Hi, hello everyone. Welcome to our next session here. I'm Ben Budish, Barclays analyst, covering the U.S. brokers, asset managers, and exchanges. And with us, we've got Mike Arougheti, CEO of Ares. Mike, thanks so much for being with us.
Thanks for having me. Hi, everybody.
Maybe just to start out with a high-level macro question, you know, can you kind of talk about what you're seeing out there in the environment, the broader fundraising, deployment, realizations? You know, how, how are things kind of shaking up? How are they evolving since, you know, we kind of last caught up last earnings?
We talked about it on the last earnings call, obviously, that given the rapid increase in rates, that buyer and seller expectations were, you know, not aligned, and that was leading to a reduction in deal flow. But at the same time, pointed to the fact that we deployed a little over $15 billion in the quarter, which, while slower year-on-year, I think was still a very healthy number. And I think that speaks a little bit to the diversity of the strategies that we have on the platform globally. The positioning of a lot of our product to be an opportunistic capital provider into the markets when they freeze up like this, and the opportunity that gets created for us to come in, particularly on the credit side, when the banks are de-risking and pulling back.
We did say, though, that we thought that there would begin to be a thawing of the markets towards the back half of the year as we approached terminal rate. We are seeing that. I think deal flow is picking up in Q3, and I would expect that that should translate into higher deal flow in both Q3 and Q4. Q4 is typically a seasonally strong quarter for the alts business, generally speaking, as everyone is rushing to get things done by year-end. So there is still an opportunity, as we've seen in years past, particularly in 2021, Q4 can accelerate pretty quickly. We'll know more in the next 30-45 days here, how the pipeline is developing. But I think the deployment picture is improving.
Obviously, you'll still have to get to a point where the cost of capital works for people in the equity market. But now that we're probably at or near the very end, and there's going to be stability in rates, I think buyer and seller expectations will start to come back together.
Great. And maybe one other sort of macro topical question is, in terms of overall credit performance, what are your sort of observations there? I think you, you've kind of invested towards at ARCC. I think, non-accruals sort of declined in the second quarter.
Yep.
What are you? Same question, what are you seeing there?
Yeah, I'd say generally across the credit portfolios in private credit, fundamental performance continues to be really strong. You know, if I were to say, the only place where we're seeing modest weakening is in the very low end of some of our consumer credit portfolios. But A, that's a very small amount of what we do, and B, it's high rate of change, but still, you know, well within historical averages. So something to keep an eye on, but not, you know, overly concerning right now. But in terms of the corporate book, as you highlighted, it's a very interesting time to be in our business, because normally when people are talking about economic downturns and recessions, rates are coming down, and we're seeing meaningful degradation in company performance. We're just not seeing that.
So as rates have been moving up on the private credit side of our book, we've basically been accelerating all of that total return into the portfolios, which has been a big benefit for fund performance, but also for our P&L, because we get incremental incentive fees over fixed hurdle rates. But we haven't seen deterioration. You mentioned the non-accruals actually went down quarter-over-quarter. They currently sit at about 2% at cost and about 1.3% of fair value, which means that even where we've seen challenges, we've been able to write those down. And again, historical averages are in and around 3%. But at the same time, we're seeing solid cash flow performance.
Quarter-over-quarter, the corporate books were logging, you know, high single digit year-on-year EBITDA down from 12 the prior quarter. Part of this story is we're seeing a slowing of growth, but we're not, you know, we're not seeing a reversal of growth, and I would expect that to continue as well.
Okay, very helpful. Thinking about sort of the growth in private credit, it's obviously become one of the hottest asset classes among the alternatives. Maybe can you walk us through the opportunity you're seeing as it's evolved this year? You know, particularly given the pullback from the broader bank syndicated loan.
It's so funny that private credit has become so hot because there were, there were decades where no one wanted to talk to us about private credit, and now it's all anybody wants to talk about. So I'm having a moment, which is kinda, which is kinda nice. What are we seeing? The banks, there's so many things we could talk about here. I think what you're referring to is, how does private credit coexist with the broadly syndicated loan and high- yield market? And it's interesting because it's getting a lot of attention now, but if you look at changes of course within those markets, there's been a big move to scale in the loan and the high- yield market that's been in place for the last 20 years.
So I always like to remind people, if you go back and you say 20 years ago, what percentage of the loan market and high- yield market was in the hands of issuers of $300 million or below? It's 40%. So that meant that your average middle-market issuer, if they wanted liquidity, would find their way into the loan or high- yield market. If you look at that percentage today, it's in very low single digits, 1%-3%, depending on when you look at it. So what's been happening, and not surprisingly, is the banks have consolidated and restructured, and the equity markets have consolidated and concentrated. Debt markets are doing the same. So if you're going to issue into those markets, you have to be of a certain size with a certain credit quality and a certain prospect for liquidity....
That, that's the right place for certain people. But I think for a lot of people, you get better execution in the private market. So this is not something new. I think the reason it is getting so much attention now is on the heels of the second time that the banks had to deal with unsold inventory. I think it exposed a little bit of the lack of risk appetite at certain points in time that the banks had to underwrite and distribute that risk. And when they pull back, there's a huge opportunity for private credit providers. To put that into context, if you look at buyout financing that was done last quarter, about 85% of buyout financing was done in the private market.
Now, I don't think that's gonna be the sustainable number, but it's a pretty good indication that, at least right now, the broadly syndicated loan and high- yield market are not functioning, you know, at full force. But there's also the other side of the bank story, is what's going on in the regional banks, and how that will roll through to create primary and secondary market opportunity for the private credit as well.
You, you're leading me right into my next question here. There's opportunity with the regional banks, you know, your ability to kind of pair liabilities or, or assets that they may not want with, you know, the right duration liabilities. How do you see that opportunity evolving? You know, what does the pipeline look like? Do you see a lot more deals like the one you announced earlier in the year with PacWest? Is there a healthy pipeline there?
Yeah, there's a series of complications 'cause... And we're still early, early days here. Obviously, you know, the first wave of Silicon Valley Bank, PacWest, Signature, First Republic, all of that noise catalyzed a number of transactions. And I'll come back and talk about PacWest, because I think it's a good blueprint for how the world may look down the road. But now we're in the early innings of, I think, particularly in the context of the new Basel Framework and the prospect of increased regulation and increased cost of deposits, putting pressure on both bank balances and P&Ls. People are now doing a pretty significant deep dive into what the path forward for any particular bank is.
I think in terms of our opportunity to partner with them, and I wanna emphasize it really is to partner, again, you'll see this when we talk about the PacWest transaction, is how do we use our flexible capital to match up with their balance sheet needs to help them either, monetize, improve, optimize their balance sheet, or continue to leverage their client franchise in a way that they may not be able to do going forward? At a high level, I think that probably takes three forms. One would be reg cap trades, where we're using our flexible capital to do something on their balance sheet that is accretive to their regulatory capital ROE. The pipeline of conversations around those types of structures is increasing dramatically, as you'd expect.
2, I think, would be generally just portfolio acquisitions, and PacWest is a good example. We announced a transaction with PacWest a couple of months ago to acquire a $3.5 billion portfolio of lender finance exposures. We went in and looked at the book. This was the second portfolio that we bought from PacWest. We actually bought a middle-market loan book from them, probably 3 or 4 years ago as well, so it was good connectivity. They had 80 clients in that portfolio. We went in and did our work, ultimately agreed to take 55 of them, $3.5 billion of aggregate commitment, $2.5 billion of which was funded. And then we went and sourced a pretty unique financing from a large GSIB to make the returns and the risk work for us and for the bank.
And so if you think about what happened there, is you had a regional bank that had balance sheet constraint, needed, needed to free up equity. We had a GSIB that had a specific structure that, from a Reg Cap standpoint, worked very well for them. And then you had us and our investors that, through the use of that structure, were able to generate, you know, some very attractive rates of return. And interestingly, this is a high-performing portfolio that we bought at a reasonable discount so far. So this was not a distressed, you know, 30, 40-point discount. This was a single-digit type discount. Now, the way that it's structured, and this is maybe to my point about what does the world look like, those unfundeds and that client relationship now kind of sits with both places.
So as those loans fund up, we'll take that risk within the structure off the balance sheet, and we now have access to those clients. But I think importantly, PacWest is still interfaceable with them as well. So there's this overarching narrative that I think is out there, which is probably not appropriate, that the private credit industry is taking share or acting contrary to the bank's interest. I think this is a good example that it's actually the opposite, right? We're allowing one regional bank to optimize their balance sheet, preserve client relationships, allowing another bank to actually get exposure to these assets in a real accretive way, and then growing our franchise.
And so maybe the third thing to keep an eye on is, once we get through this wave of portfolio transactions and reg cap trades, is I think within the banking universe writ large, there'll be more consolidation, more regulation, higher reg cap requirements, which means that most banks, big and small, will have to go through an appropriate review of what businesses they're in, where they want to put resources, and where they want to allocate capital. And will hopefully be talking to folks like us about how to be a balance sheet partner, right? Not a competitor, but if I'm de-emphasizing a certain business or I deem XYZ business non-core, I can sell the business to Ares, or I can keep the business and work with Ares as a balance sheet partner to kind of extend the duration and value of my client franchise.
We're also seeing that dialogue pick up well. It's early days, but I do think that this is the jumping off point for a pretty big, you know, secular growth opportunity for private credit as the banks continue to dial it in.
So given the size of that opportunity, how do you think or how are you doing competition? Or, you know, you mentioned earlier having a moment. Presumably, you're not the only one, even though Ares is, you know, quite scaled here and very good at it. But there are, you know, there are others that do this, and, and presumably, again, given the size of the opportunity, more will want to come. So are you seeing or is there any worry that there may be too much congestion in the private credit markets from providers like yourself? Is competition picking up? Has it increased in the last six to twelve months? What's your view there?
Again, it's hard to give short answers 'cause private credit for Ares is a $250 billion-plus global business, and we're in real assets lending, corporate lending, structured lending, and all things in between. The simple answer, I would say, is no. And despite all of the attention that private credit is getting, it is still undercapitalized relative to the total addressable market opportunity that exists for private credit. And one way to think about this, and this would be true if you looked at each of the markets, is just look at corporate private credit, where there's been a healthy amount of capital formation.
But if you were to ignore the number of headlines and the number of people who are raising their hands and saying that they're in the private credit business, the reality is the bulk of capital getting raised in the private credit space is continuing to go to incumbent large private credit managers because of the benefits of scale in that market. If you think of it as through the lens of who are the users of this capital, the bulk of users of private credit in the corporate space are buyout firms. There is a little over $1 trillion of uninvested buyout dry powder in the market today, and if you were to aggregate available private credit dry powder, it's about 20% of that.
So despite all of the, you know, noise about the amount of capital that's been raised, if you think about your typical buyout of today, equity contribution to a buyout today is about 57%. That's an all-time high, which maybe we'll touch on or not in terms of the credit quality of the new, new investment environment. But if you say it's 50% equity, 50% debt, that means with $1 trillion of equity dry powder, you need $1 trillion of credit capacity to satisfy that. Now, over cycles, it's been more like 2-to-1. So if you have a trillion of dry powder, you need $2 trillion. We have 10% of that.
The high-yield loan market will take some of that, but there's still a lot of room to grow in corporate private credit just to satisfy the demand of the already raised private equity capital, putting aside all the things we just talked about in terms of the structural changes in the market, which will create white space as well.
Maybe just following up there on the topic of structural changes. So you mentioned equity portions are now much higher, but historically, you know, it was a bit lower.
Mm-hmm.
I think I've heard you say that, you know, we're in an unusual rate environment. If you only consider the last 10 years over a longer span of time, this is, you know, fairly normal. This could be rates of, you know, 4%-5%.
Mm-hmm.
So do you see that sort of changing? What's kind of like the timeline? How long does it take for the actors to get comfortable with, you know, that sort of historic, you know, equity layer?
Well, I think for the new transaction flow, easy. I mean, a lot of it is just you need a discount rate to be reflected in the valuation environment and for people to be able to transact. One of the reason why equity contribution is high now is because the cost of debt capital is too high to make the valuation work absent equity contribution. As a quick aside, what we are seeing in our markets, which is interesting, and even going back to the PacWest, sell your best assets at the lowest discount. We're seeing that across the waterfront. So normally, when you're talking about a cycle and you're talking about opportunistic investing, you're talking about weaker performers and driving return through structure.
Most of the things that are coming to market and transacting are higher quality because they can actually still generate high valuations and access cost-effective financing. So it's an interesting deployment opportunity now because we are putting out real high-returning dollars in some of the best quality assets that we've seen in a long time. I forgot what you had asked me. Anybody remember what he had asked me?
I think, I think we got most of it.
Okay.
So maybe one sort of more high-level question on private credit, as it were. So in terms of geographic mix, you know, you're one of the largest direct lenders in North America and Europe. You're quite active in Asia. Can you talk a bit about the structural differences between those regions and are the trends we're seeing here playing out there? Is this sort of a similar opportunity opening up outside the U.S., and are there any other sort of, you know, tailwinds or other dynamics we should be aware of?
Yeah, it's interesting. Rightly, at this moment in time, they are presenting different opportunities. You know, as business builders, we had a view that, you know, as went the U.S. would go Europe, and as when Europe would go, Asia region. Over time, combination of structural changes within the banking market, development of the capital markets, institutionalization of the equity markets, development of regulatory frameworks to support, you know, credit provision. So that's all happening, but it's happening at a different pace. So Europe is obviously caught up to the U.S. The Asia region is still, you know, in its infancy in terms of the institutionalization. Obviously, you're beginning to see different economic outlook as well, right? And when you have a disconnection with the economic outlook, you're gonna see a different opportunity set to invest.
So despite the fact that everyone's still calling for a recession, despite the continued strength in the economy now, two years removed from the initial call, the U.S. economy remains very strong, and the Eurozone economy is more challenged. And, you know, that may create a different set of investment opportunities in the European market than in the U.S. And in the APAC region, obviously, you're dealing with a whole mix of developed and developing countries. You're dealing with slowdown in China, and the need to resolve the real estate crisis in that market that has ripple effects. India is obviously differentiating itself pretty aggressively, both in terms of regulatory development, but also growth, and demographic profiles.
India is an interest, Asia is an interesting place to invest right now, and the bulk of what we're doing is through our opportunistic and special situations business because of the need to be able to pivot between these different markets. But we have been investing, with a fair amount of success in growing a, a more traditional private credit and direct lending business there, because we are beginning to see, you know, all of the patterns that we know, from our history in the U.S. and Europe emerge there. So I think that in the not-too-distant future, you'll begin to see that market develop pretty well.
Maybe moving on to fundraising. So starting with another kind of high-level question, maybe your thoughts on sort of broader secular trends in alternative assets. You know, where can institutional allocations go, and how does this differ by asset class? You know, how do allocators think about private credit, private equity as alternatives bucket, or, or how do you think about, you know, growth and the opportunity there, from the allocator's perspective?
Yeah, I think that, look, it's each investor is different, institutional versus retail. But I would say as a general statement, if you talk to CIOs or the heads of wealth platforms or large FAs, they'll all tell you that they're underallocated to alternatives. And generally speaking, I think people want higher return per unit of risk that they take. I think they've re-underwritten the value of liquidity and have determined that, you know, particularly in yield strategies, they need less liquidity than they otherwise used to. And again, you look at what's been going on, the value of fixed income in an environment like this, and it's great if you have liquidity, but if there's not a price at which you would monetize, why did you pay for it in the first place?
So if you were to look across the entire landscape, I would say generally, the consensus would be that the alternative space is slated to grow 10%-15% across the board. You'll probably see slightly higher growth in private credit. You may see modestly higher growth in infra, but it depends on the investor, because certain investors don't have allocation to private credit, and you'll see a massive ramp. So I think it's gonna be investor specific, geography specific, but industry index returns should be in the mid-teens in terms of growth. And then obviously, if you look at what we and some of the other large platforms have been able to do, we're growing at twice that industry growth, which speaks a little bit to this trend of the larger getting larger. And maybe that's a good segue to fundraising.
You know, our fundraising experience this year has been incredibly positive. There was a lot of conversation coming into 2023 about the denominator effect and the challenges that alt managers may face raising capital, particularly in private equity, because obviously a lot of capital was raised and deployed in 2021. People have not returned the capital. DPI is low, and so it's hard to go back and ask for it if you haven't returned capital. We came into the new year with a pretty clear view that we articulated to the market, that we expected our fundraising this year to exceed last year. Last year, we raised close to $60 billion, about $57 billion, and potentially, depending on timing, could approach our record fundraising year, which was 2021, which was about $76 billion.
So that was kind of the range, you know, call it $60 billion-$80 billion. Through the first six months of the year, we had raised about $31 billion, and then as of the date of our earnings call, we had raised about another $7 billion or $8 billion, so close to $40 billion through the first six months. So on pace, and we are in the market with some very sizable, you know, commingled funds within our broad credit complex, our U.S. Direct Lending Fund, European Direct Lending Fund, U.S. Alternative Credit Fund. So, we're not seeing a slowdown in demand for private credit strategies generally across the board. We're not seeing a slowdown for those types of strategies in retail either.
So we'll have to see how the rest of the year plays out, at least from the Ares perspective, the fundraising momentum is still good.
You kinda answered my next question about these flagships, but maybe we can talk a minute about some of the newer strategies on the Ares platform, secondaries, infrastructure. You know, how do you see fundraising evolving, you know, across those, in those asset classes, and, and how do you think about, you know, these new strategies scaling up over time?
Yeah, like I said, I think the only place that the market everyone in the market is seeing longer fundraising cycles for their core buyout funds. And that's just because you've got denominator effect and a difficult realization environment. Other than core buyout, I think the appetite for yield product and real assets is still pretty strong. We've seen good demand for our opportunistic real estate strategies. We've seen good demand for our real estate lending strategies. Our infrastructure product, which you asked about, you know, we're in the market with an energy transition and climate infrastructure fund, which is pretty on trend, and enjoying good success. And we are, as we talked about on our earnings call, likely to launch the next vintage of our infrastructure credit fund towards the back half of this year and into early next year.
Again, I think all things private credit will be well received.
Got it. Maybe moving on to realizations a little bit, thinking specifically about the European waterfall opportunity you have. You've talked a bit about the P&L impact. Can you talk a little bit about the hurdle rate on these funds? You know, should investors-- Are there, are there any, you know, kind of realization risk that investors should be thinking about, given a lot of these were invested in a sort of low rate environment? Understanding that a lot of this is private credit-centric as it is, but how do we think about... I think you've laid out the opportunity. What should we understand about the risks?
Yeah, it's funny, the risk in and of itself presents other opportunities, and with what's so interesting about the composition of our business now is because of the diversity of strategies and structures, when one fund is realizing, the other is deploying. When realizations increase, it has certain implications for deployment. So you zoom out and you say, "What world, you know, are we in?" You're probably gonna see that one part of the firm is benefiting disproportionately from that, that environment. Why we keep talking about it, just to level set everybody's understanding, is if you look at the incentive fee generating AUM that sits on our platform, a significant majority of that is in credit funds, and the significant majority of those are European waterfall.
Which means that we get our incentive fee after the investors have gotten their capital plus preferred return or hurdle rate back. So as these funds mature and stack up, you begin to generate carried interest, incentive income, PRE, even absent realization, just because you're earning above, above the hurdle rate. And Jared, who's here in the audience, put together a great presentation that's on our website to talk about what that means for us, financially. But there's about $2.5 billion of opportunity in the ground in these European waterfall funds that will begin to show up in the P&L in earnest, beginning, you know, back half of this year into 2024, and that's absent accounting for all of the flagship credit funds that we're raising now.
What's so interesting about it, and you'll see this if you look at our performance fee line item on our balance sheet, while many of our peers are seeing that number shrink because the value of their private equity portfolio is reducing, ours is actually growing. And the reason it's growing, to your question, is because we earn incentive fee above fixed hurdle rates. And depending on the strategy, it's usually 5, 6, or 7%. And so if you have a credit fund that is now enjoying 500 basis points of excess return because the base rate has gone up, that basically all flows into that accrued incentive fee bucket, and that's a permanent accumulation of return. So as these start to mature, you're gonna see more predictable and more consistent PRE generation than I think the industry is accustomed to seeing.
Interesting. You kind of answered my next question, too, which was-
Keep doing that, I promise.
That's okay. How sustainable is this trend? You know, in three, four years, are we gonna talk, be talking about the next five, six, seven years? And, you know, call me a greedy sell-side analyst, because you've already given us through, like, 2028. But it sounds like the answer is yeah, this is quite sustainable. Is that-
Yeah, I think we'll have... Look, you've tended to talk about it in two-year increments because some of, some of it will be timing dependent in terms of what market environment you're in, but yes, it will reload. So it's interesting. Once it turns on, now that we're raising the next vintage and those are larger or at least the same size as the prior vintage, that number will, will keep stacking. You would ask about refinancing risk. I wouldn't call it a risk. There's a potential that if the market recovers, that those portfolios harvest quicker, which would mean that you would see that PRE come in sooner, but you wouldn't get all of the compounding opportunity that I was talking about.
That, to me, is as much an opportunity as a risk, because that means, again, that we've re-returned to a healthy deal environment. We're returning capital to our investors and reloading the, reloading the machine. But yeah, there is, you know, mathematically to the extent that the transaction environment picks up dramatically, you know, and you accelerated the harvest period, that, that would come in quicker.
Maybe one last question on that topic. So as rates have come up, are you seeing LPs demand higher hurdle rates on any of these funds? Is there a risk that happens, rates come down, and then in six years, the story is different, or?
You know, it's interesting because the answer is no, and I think the answer is because these are pretty well-entrenched market conventions. If you think about it from the investor perspective, and again, I know that we've all been conditioned to zero rates, but if moved to a floating hurdle, there are puts and takes on either side of that. And so, it is very rare that you're having a negotiation with an investor about that hurdle rate. You may be having a negotiation with the market about where to set it, relative to the perceived risk and return opportunity in a given structure. But, you know, again, we're in the market now with 25 funds, all with different hurdles, and no one's trying to improve the value of the fixed hurdle rate.
... Got it. Maybe turning over to retail now. So can you kind of remind us, what are your key products in the market? Where are you seeing the most traction, and in particular, ASIF, sort of your newest fund, what sort of receptivity are you seeing?
Yeah. So, retail is obviously, I think, a big opportunity for growth with alternative managers. I think Ares has one of the largest and best-developed capabilities in that market. We have about 125 people in our global wealth management solutions business. It is, up until this point, been largely Europe, North American wealth distribution, but a lot of the recent investments we're making are to globalize that into Europe and parts of the Asia Pacific region. Right now we have five key funds in that chapter. We have a diversified NAV REIT, we have an industrial NAV REIT, we have a diversified interval fund that focuses on all things credit that we do at Ares.
We have something we call the Private Markets Fund, which is a private equity exposure where we're leveraging our secondaries business to deliver PE exposures to the retail investor. And the most recent, which you referenced, is our non-traded BDC, which we call ADCF fund. We launched that with seed capital at the beginning of the year, grew it with seed to a little over $1 billion, about $1.3 billion, and then put it into our first wirehouse partner in July. So we're one month in, or I guess two months in. Very pleased with the reception that we've gotten, and not surprising to us, given the and the brand that we've built at Ares Capital Corporation in the traded market. I think that's translating into significant demand for the non-traded product. August, similarly, we're seeing good flows.
We'll be continuing with our one wirehouse partner there for the next couple of months. We're seeing good RIA make up for the product, and then I would expect that we'll see another, you know, another wave of wires pick up the product here. So, yeah, early indicator are the demand that we expected to see is there. And I think given the investments that we've made in the channel, that we're taking share, and if you look at the public information which comes out monthly, you'll see that we're probably the, you know, second or third in terms of capital raise in the channel. And in terms of share gains, I think we probably picked up more share in that channel in the last year than anybody else.
So yeah, still a lot to do to continue to build that out and globalize it, but, you know, trending in the right direction.
Just following up on your distribution comment, I think you were talking about ASIF specifically. So in terms of the broader fund complex, is the distribution more built out, or is there similarly like a long way to go in terms of more wires, more countries, more RIAs?
So we have, we have all of those products. Not every product is in every wire, but we have product in every wire, and most of the product, you know, is in, in more than one. A lot of the build-out of the stuff we group in the domestic market is just basic blocking and tackling. It's kind of moving through the, the different platforms to enhance the distribution. I think the big step function change is gonna be the international expansion, which is where we're spending a lot of our time.
Great. Maybe another question, sort of, thinking about real estate, kind of understood on the retail side to be a little bit more challenged, but, you know, the momentum is sort of picking up elsewhere, credit, private markets, sorts of funds. But you have a particularly interesting offering with your 1031. Can you talk about that a little bit, a brief overview, and how big do you think flows from that specific piece could become over time?
Yeah, it's actually hopefully this isn't too esoteric to talk about, because I actually think it's a good example of how we try to innovate around some markets. But if you were to look at our non-traded REIT flows, while we've seen inflows slow, we have not actually experienced outflows. So one of the overarching narratives for the last, you know, 12, 16 months has been outflow pressure in the non-traded REIT market, and if you look at our experience, we're actually seeing net inflows. Some of that I think is performance, some of it is structural. We're running with lower leverage and different set of exposures, but the big contributor is this 1031 program. And without getting into the weeds on what it is, effectively, we...
mechanism to allow high net worth individuals to contribute property through a 1031 exchange, and over time, take back shares in our non-traded REIT. And that's represented historically, depending on when we look at it, 40%-60% of flows. But there are two benefits: One, they're larger. So the average commitment in the 10-31 program this year, I think, is about $1.8 million, which in the retail space is a pretty big ticket, but it's sticky. Because of the structure of the 1031, that capital stays in the fund longer, and so it could to some of the outflow pressure that some of our peers are seeing. It's also a huge win for the advisor community.
If you think about a high net worth, ultra high net worth advisor that has a client with a real estate portfolio, chances are they're not-- that's not in their portfolio. They may see it, it may be in their purview, but they're probably not managing it. By accessing our REIT through the Ten thirty-one, the advisor delivers a great tax outcome to the client, but they also now bring the NAV shares into that portfolio, so there's actually a share gain. So the client gets good execution and preserves the tax-free exchange. The advisor expands the AUM, and Ares gets sticky, taking that client. So, yeah, pretty innovative, very differentiated in the market, and I do think it's one of the reasons why we're not having the same exposure.
Great. Moving over to insurance for a minute. It feels like, you know, it's a much bigger theme for the public peers, and it's sort of tied in with private credit. Now Ares has plenty of growth drivers, even separate from the insurance business. Can you start, though, maybe talk a little bit high level, what you're kind of doing there? Talk about Aspida, that-- You know, what, what are your sort of long-term ambitions, for the insurance business areas?
Yeah. So we, like some of our peers, understand the value and the linkage between insurance company liabilities and alternative assets, particularly alternative credit. And I think for forever, insurance companies were largely liability driven. Now, the opportunity to generate excess return on the asset side obviously is a huge value creator for insurance companies. That is not lost on us and has not. But up until a number of years ago, we were largely focused on building our third-party insurance client business versus building a, a captive or an affiliate. So to put that in perspective, if you look at the $380 billion plus assets that we manage, over $50 billion of it right now is probably in the hands of third-party insurance clients.
Order of magnitude, about 150 global insurance companies have capital with us, largely as LPs in our funds, large strategic SMAs around parts of our credit franchise. Then a number of years ago, we set out to build organically, a life annuity platform called Aspida. We did that with, you know, modest investment off the firm's balance sheet. And if you look at our Investor Day presentation from summer of 2021, we basically put out a view that we would grow that about $5 billion per year to get to $25 billion of AUM, against guidance, we would be 500+, but call it 5% of our AUM at the time. And that success would be Ares managing 50%+ of those balance sheet assets on behalf of the Aspida balance sheet.
Where we are today is the platform is fully built. Being that we did it organically, we're not dealing with any legacy back books, so we're not playing defense in the existing exposures. We turned on our organic annuities distribution in earnest earlier this year, and the combination of our reinsurance flow agreements and our annuities distribution has us pacing almost spot on to that $5 billion, you know, per year type growth. So, at the end of Q2, we were about $9.5 billion of AUM. Ares today manage about 60% of the balance sheet, largely within our private credit franchise, and I would expect that growth to continue on trend. In terms of our aspirations, I think it will be a very important complement to our third-party business.
It will also be an important complement to our, you know, higher risk, higher return type strategies. But I don't expect it to grow beyond that 5%-10% of our AUM. So unlike some of our peers, I think, who have gone balance sheet heavy or, you know, insurance heavy, we're approaching it a little bit differently. We're just to meaningfully grow it. In absolute terms, obviously, a $50 billion insurance balance sheet is a meaningful business, but we just don't want it to overwhelm the asset management platform, the third-party clients we have.
Understood. Well, Mike, unfortunately, we're out of time, but, thank you so much for being here.
Thank you. Great. I appreciate it. Thanks, everyone, for your time.