Before we get started, I've been asked to direct your attention to important disclosures on the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Good afternoon, everyone. Welcome back to Morgan Stanley's Financials Conference on Mike Cypress, Equity Analyst covering brokers, asset managers and exchanges for Morgan Stanley Research. Welcome to our fireside chat with Ares Management.
We're excited to have with us today Mike Arougheti, who is President and CEO of Ares Management and Mike McFerran, Ares Management CFO and Chief Operating Officer. Ares Management is a leading global alternative investment manager with about 227,000,000,000 of client assets under management invested across credit, private equity and real estate to name a few of the strategies. Mike, thank you for joining us today.
Hi, Mike. Thanks for having us. Appreciate it. Great.
So why don't we dive right in? It's been a busy year for Ares. You guys have done 2 acquisitions, large amount of fundraising and deployment activity. Can you talk about how you guys are allocating your time these days? How you see the strategic direction of the company evolving?
And what would you say you're most excited about here?
Gosh, it's such a simple question, but there's never a simple answer. And I find whenever somebody asks me that, it adds up to 120% or 130%, which either means I'm working too hard or it's not that straightforward. So maybe I'll quickly zoom out and tell you what I'm excited about, which is everything. And at the risk of sounding cheeky, we're just in such a unique moment in time for our industry and our company. Were you to sit in on some of our strategy meetings and board meetings or employee town halls, we spent a lot of time talking about Ares as a growth company in a growth industry.
And who would have thought if we said that 20 years ago, people would have looked at us funny. But when you look at what the industry is doing and what we're doing within it in terms of our 20% plus growth rate and as you pointed out strategic expansion both organic and inorganic, thinking as a growth company in terms of where to take the business and how to make sure that we're managing the people and the culture and the systems and the processes is just a lot of fun. And I can't say that there's any one part of the job now that is more exciting than the other. There's just so much opportunity ahead of us. In terms of how I spend my time, it's always a good question.
It's important that my calendar reflects my priorities and not the other way around. And if I spend 50% of my time generally on what I would call corporate strategy, That's everything from some of the M and A that you referenced to thinking about new product development or new distribution, but really think about where the company is going, where the industry is going and how we participate. Fortunately, I still get to spend a decent amount of my time on investment committees. That's where a lot of my passion is and where my roots are. I probably spend 15 ish percent of my time on the investment side of the business, sitting on various investment committees and working with the teams through the investment process.
Probably spend 15% of my time or so generally, what I would say, managing the day to day of the business with Mike and the extraordinary management team that we have here and that's just the day to day things that pop up. And then the other large part is really just spending time with our large investors, both public and private and making sure that there's connectivity at the top of the house around making sure that we're meeting the needs of our investors in terms of the delivery of returns and the client experience and that takes up a fair amount of my time as well. So I think that added up to 100 in COVID, I think days expanded. So I could probably come up with other buckets in terms of housework and cooking dinner and things that have found their way into my day, but that's a general view.
Great. And Mike McFerran, would you want to add anything else there?
Mine's not dissimilar from Mike's. I'm going to avoid housework while we're on this. You won't see that out. I think I'm quite capable. Look, I think I would echo my view on excitement between all of our organic avenues of growth and all the exciting things happening around our firm, the transactions we've done recently, the excitement of working with new partners and the fun we're having doing that, it's just really a great time.
And it's really complemented by we're starting to get back in the office more. So it's constantly also feeling the adrenaline boost of seeing each other more often and a little less Zoom, a little more face to face has been great. On time allocation, not a different mic. A lot of it's day to day running the business and working with my deep, talented group on the non investment side across our functions of all the things we have going on day to day of our current portfolios and funds and capital raising and working to integrate new businesses. But again, we have a wide deep team and we're having a lot of fun doing it.
Great. Why don't we dig into some of your recent acquisitions starting with Black Creek, which is a private real estate manager. Yet you guys already have a real estate business. So can you talk about what's unique and differentiated about Black Creek? How it complements your existing
platform and how you can enhance each other's growth prospects? Sure. We are very excited about the Black Creek acquisition and to Mike's point, bringing on new capabilities and working with new partners. You've heard us, Mike, before just talk about how important is that when we're making acquisitions that we get the cultural fit right, because if we can't get the culture right, then obviously we can't drive the type of synergy and growth opportunity that we see. So I think the good news is deep alignment with the partnership team there, shared vision for what the business could be in partnership and just excited about what the future holds.
I'd say at a high level and we haven't made a secret about it, we have a strategic imperative to grow our real estate business. That's an indication of a couple of things. 1, it is probably our largest global addressable market. 2, it probably has the most fragmented competition. And 3, while we have a best in class team and if you look at our publicly disclosed track record, you'll see that the investment performance has been exceptional there.
It's still small relative to some of our other businesses. And what we've learned over our 25 years building this company, size is actually a big competitive advantage as you think about aggregating capital and attracting and retaining talent and building out products. So there has been an imperative to grow real estate. So I'd say 1st and foremost, with Black Creek comes $12,000,000,000 of AUM, which now would bulk up our global real estate franchise to $30,000,000,000 with multiple growth avenues and positions it now as one of the market leaders in the space, which we think is going to be important for our long term sustainable growth. In terms of Black Creek specifically, there are a couple of things that it's bringing.
One, they have a core expertise in industrial real estate. And while we have had a great track record investing in the industrial landscape, it has not been to the same extent or with the same focus that our colleagues at Black Creek have. Over the last number of years, they've probably been one of the top 3 developers of industrial real estate in the country. And importantly, they have a vertically integrated approach to the development and management of those assets, which is slightly different from the way that we position. So they're bringing deep domain expertise, but also a level of vertical integration and a set of capabilities that we don't currently have.
Part and parcel with that, because of the focus on industrial and the way that they do the business, most of the funds that Black Creek manages are skewed towards what we would call the core and core plus part of the market, longer duration, lower risk adjusted return product than what we have done historically at Ares, which tends to skew more towards the opportunistic and value add side of the spectrum, both in our equity business and our credit business. So when you bring the 2 businesses together, very complementary, very little overlap, but now allows us to have the full product set from opportunistic all the way through core, which we think makes us more impactful in the market, but also gives us just much broader product to be relevant to our investors. Because of the core and core plus nature of what they do, a lot of what they manage are open ended funds or non traded REIT product, which obviously projects as permanent capital. So because of the duration of those assets and the way that capital forms there, not only is it coming with the opportunity to broaden the product set, but it's coming with differentiated capital, particularly around the non traded REIT sector.
And if you look at Black Creek, of their AUM, a little over $5,000,000,000 is in the non traded REIT space. In 2020, they were actually the 2nd most active razor of capital in that non traded REIT channel. And into 2021, they're probably number 2 or number 3. We see great opportunity to leverage those core products to keep growing the core REIT franchise. As we've talked about on prior conversations, as we see a retailization of alternatives, the ability to leverage their capital markets and distribution expertise, which is built around a 70 plus person broker dealer, should allow us over time to sell existing product more aggressively into the retail space, but also to take what we do now and develop products specifically for that channel.
So it's really interesting. There's a great real estate synergy and complementarity, but then there's also a very significant distribution opportunity that we see in joining forces.
Earlier this year, you also announced the acquisition of Landmark, which is a secondary private equity firm. What's so interesting about that part of the marketplace and it makes sense to add to your platform and how do you think about extending their capabilities into credit?
Sure. It's a good question. And again, we are fortunate that we knew the partners of Landmark for a long time had high conviction on the cultural fit and the complementary nature of our investment approach. The reason we're so interested in secondaries and it speaks maybe a little bit to the filter that we apply to the M and A landscape. Secondaries in our opinion is going through a moment of transformational growth.
If you look at the market historically up until about 5 years ago, it was characterized predominantly by LP led transactions, meaning limited partners looking for liquidity solutions for their private equity holdings. It was predominantly private equity oriented. So about 90% plus of volume in that market was around private equity fund investments and it was predominantly a North American business. Over the last 5 years, what you begin to see is a shift to other parts of the private market. So not surprisingly, as private real estate capital formation has increased infra and credit, the opportunity to bring secondary solutions into that market is following.
We believe that the breadth of that market speaks to the diversity of our capability and we should be able to capitalize on the growth. 2 is the globalization. So we're beginning to see volumes increase outside of the North American region into Europe and we hope soon to be Asia. And as we've talked about, as we're globalizing our business, we think that we can help our partners at Landmark globalize. And then 3rd and probably most important is there has been a very significant shift in the market away from LP led liquidity solutions to GP led liquidity solutions.
And what that means is rather than the LP looking for liquidity in the secondary market for fund investment, it is a GP looking for some kind of a bespoke liquidity solution within its portfolio or within the GP itself. So that can take the form of continuation funds, fund restructurings, fund extensions, NAV loans, single asset or multiple asset direct secondaries. And so when you think about what is required to succeed in this new landscape where GP led is outpacing the growth of LP led, its scale of capital. It's one of the reasons why we were attracted to the Landmark platform because it brings immediate scale of capital. 2 is relationship network and sourcing.
And if you look at the combined business, Landmark has 600 LP relationships. We have over 1200. Combined, that sets us up well to continue to participate in the LP led part of the market. But what Ares brings to the table that's unique is we have one of the most developed calling efforts on the private equity real asset GP community. And so while up until this point we had been leveraging those relationships with financing product, it's a pretty logical step to be able to offer secondary solutions and liquidity into those relationships as well.
So when you think about this market, just to give you a perspective on the growth opportunity today, if you looked at the installed base of capital in the private markets, primary, secondary capital represents only 5% of the installed base. So as this market continues to evolve and expand, we just see a tremendous amount of white space to grow into with our new partners at Glenmark.
Great. Why don't we shift gears and talk a little bit about some of your initiatives over in Asia. Last year, you acquired a majority stake in SSG, that's a private credit firm in Asia. Can you talk about how the integration is progressing and touch upon some of the initiatives that you have in place there, particularly around extending into other asset classes, bringing private equity and real estate over to Asia?
Yes, it's a great question. And I think as we've talked about with you and with others, we really see the long term growth opportunity for alternative managers in Asia as one of the next big markets to open up. That's a function of where the private equity community is now changing bank behavior, the development of capital markets and so on and so forth. What SSG has that is unique is 1, again, cultural alignment in terms of how they think about investing and how they think about business building 2, deep institutional relationships and deep institutional track record. So they came to us with almost a 15 year history of success investing across the region in developed Asia and developing Asia.
But their core focus historically had been on distressed, opportunistic and special situation investing. That continues to be the core capability of that franchise, but we've already begun to see it diversify into more traditional direct lending. And the platform is in the market with a fairly sizable direct lending fund as we speak. We're going to look, as you mentioned, to build off of the platform they've built across the region to both expand our credit product set in places like Australia and New Zealand, where the market is more developed and more akin to what we're used to seeing in the U. S.
And Europe behind the sponsor community and unpacking their long track record investing in the real estate and infrastructure markets through their credit funds to begin to expand into other parts of the opportunity set. So integration has gone extremely well. They are fully integrated. The teams are working well together, fully collaborating. Investment performance is exactly what we hoped it would be, if not better.
Fund growth in terms of the core funds is tracking to what we expected. And now we're in that phase where we're picking our head up and starting to launch new products and open up new markets. And we're a little over a year in, but so far so good.
Great. Moving on to a different topic, interest rates, one that frequently comes up in conversations with investors these days. Can you just help us understand some of the moving pieces around how higher interest rates could impact your portfolio and also the P and L? And then any sort of thoughts around what level of interest rates could begin to have an impact on fundraising for credit or maybe IG or high yield become a bit more competitive?
Yes. So there's a lot of different ways to approach that. Maybe let me start with the last part of the question, because I think it's important for people to hear it as they think about the durability of our strategies. 20 years ago, when this industry was still in its infancy, most people were looking to alternatives for some kind of absolute return outcome. So while it was deemed alternative, it was never really clear what it was an alternative to other than it was a place where people were trying to make very high risk adjusted return and very high multiple invested capital.
And that was true in private equity, venture and real estate, but it was also true in the early iterations of private credit, where our first private credit funds were mezzanine oriented looking to make mid teens type rates of return. The reason I'm going back in time is if you look at what alternatives means today, particularly alternative credit, most of our large institutional investors are not looking to us to generate an absolute return or a specific investment outcome per se. What they're really looking at is saying, can I generate excess return in the private markets relative to the public market equivalent? And that public market equivalent depending on the investor may be the syndicated loan or the high yield bond market. It may be the securitization market.
It may be the CMBS, RMBS market and so on and so forth. But depending on where the investor lies from a cost of capital or regulatory framework standpoint, that's what they're most focused on. So people should understand that alternative credit today is a net spread business. Our cost of capital generally reflects the conditions in the liquid market, but our asset spreads don't. And so what that means is that even as interest rates expand or contract, as long as there's a persistent excess premium that's getting created by our sourcing or structuring or creativity, complexity relationship, illiquidity, that's what they're trying to capture.
So when rates move, as long as our excess return is moving with rates, we would not expect to see any changed investor behavior. And I think we've now seen enough volatility in rates as this market has matured and globalized to have high conviction on that. In terms of the positioning of the portfolio, I think the nice thing about the business is if you look at our $227,000,000,000 of AUM, dollars 150 plus 1,000,000,000 of it is in the private credit markets. The bulk of our private credit assets tend to be shorter duration floating rate assets. And to the extent that we are leveraging them to drive levered ROE, we're leveraging them with match duration, match funded floating rate liabilities.
And in the case of some of our larger entities like our publicly traded BDC Ares Capital Corporation, we're leveraging them with very long dated lower cost of capital fixed rate liabilities. So if you just think of $230,000,000,000 of AUM with a significant majority of those assets in the private credit markets, as rates go up, particularly given some of the liability structures that we have in place, that would be a very big boon to the performance of those portfolios. If you then say why are rates going up, if rates are going up for the right reasons, we have generally seen that that means that we are in an environment that is benign if not constructive for underlying credit performance. So the setup for us is actually pretty good. That being said, we've demonstrated, we hope, over our almost 30 years of investing the ability to navigate short term moves in rates.
Obviously, we've already shown that we can do that. If you look at where LIBOR is today, that 12 basis points relative to its historical average pre GFC of over 3, we've already demonstrated that these assets given our sourcing and structuring will perform regardless of the rate backdrop. Maybe quickly moving on to some of our other businesses, a lot of our real asset portfolios are inflation hedges, if you will. So offer us an opportunity to see values move as a hedge. And so the place where you're probably most vulnerable would be in some of our core buyout strategies where we're using leverage to help support returns.
And obviously, you would see some modest reduction in profitability. But I think importantly, if you were to go back and look at how Ares generates private equity returns through cycles, 80% plus of our value creation comes from growing cash flow and not from financial engineering or the use of excessive leverage. So any increased cost burden, if you will, from rates going up, I believe would be more than offset by the fundamental growth that we're going to be seeing in those companies. Mike McFarlane, do you want 2 seconds on impact to the P and L?
Look, from the firm's P and L, I think you hit it, Mike. The portfolio is primarily floating rate to the extent that it's got yield exposure. So you expect depreciation there and higher income. Our balance sheet, and again, we're a balance sheet light business, so it doesn't have a material effect on us. We'll obviously earn a higher rate, but and all of our debts locked in a fixed rate.
So I think neutral to up and just touch on something you already said, I'd say the obvious is, if you experience an accelerated increase in rates, which I don't think any of us are expecting, as Mike touched on by historical standards, If you saw rates starting to walk up to something pre GFC, that's almost returning to a bit of historical normalcy, which I don't think is likely, but if that did, that's probably the most plausible scenario of a higher rate increase. If you do see short term spikes, then introduces market volatility, which as we've always said is healthy for us.
Great. And we have about 5 minutes left. I'd love if we can hit on maybe 2 more topics quickly. Maybe just first, 2 minutes maybe if you can quickly just on deployment, you have about $57,000,000,000 of dry powder today in the current environment. Where are you seeing the most attractive opportunities to put capital to work and what areas are you guys avoiding?
Yes, there are very few areas we're avoiding. This is one of those nice markets where you've got the global recovery taking root, good liquidity in the market. So transaction volumes are up plenty to choose from. And generally speaking across all of our strategies, we're closing less than 5% of the deals that come across the transom. So with the markets healthy, we're seeing more and able to find plenty of attractive things to invest in and that's pretty much across the board.
That $57,000,000,000 number that you mentioned, we've historically said that when you look at our dry powder, we'd like to see it get deployed somewhere between 18 36 months. Just to put that in perspective and kind of corroborate against where we are now, Q4 of 2020, which was a little bit of a recovery quarter towards the end of the pandemic, particularly in the U. S, we deployed about $7,300,000,000 in our drawdown funds. Q1, which is a seasonally slow quarter typically, actually came in at about 9,000,000,000 dollars And as we've talked about on both the Ares management earnings calls and the ARCC calls, deployment continues to keep the pace with that as far as we can tell. If you look at $57,000,000,000 and you said generally speaking, you'd love to see it get invested in 2 years, we're clearly at or ahead of that pace given the activity levels that we witnessed in Q4 and Q1.
Great. Maybe just final question here, can't get away without one on the margin. So FRE margin, you guys have made some significant improvement on the FRE margin earlier this year, you said you could hit a 40% run rate by 2023 or earlier. And since then, you've announced the acquisition of Landmark, which adds about 200 basis points to your FRE margin. So would it be reasonable that to assume that by the end of 2023 or earlier, you could be at a 42% run rate?
How should we be thinking about the moving pieces there?
So, Mike, you said it appropriately. We said 2023 or earlier. So, I'd highlight the earlier. I think we've shown consistent margin expansion. If you look at us from 2017 to 2020, our margin expanded on average almost 2 50 basis points a year.
From 2019 to 2020, it expanded almost 500 basis points. And as we've indicated, I think rather consistently in public forums, we don't see any limiters on margin expansion and it's really a function of putting the dry powder to work and as Mike talked about the deployment. And that's coming online, obviously, at a much higher margin than the business operates at. You mentioned Landmark, which had which we've shown is going to be accretive to margin. So, yes, I don't see anything that's we haven't revised guidance yet, but I your math is right and we continue to see nice margin expansion.
And what's most important to us is to grow the business, grow the business smartly and invest for growth and we're doing that, but we're able to do that with margin expansion as we go.
Great. Well, I'm afraid we'll have to leave it there. We're out of time. Mike McFerran, Mike Arougheti, thank you so much for joining us today. Appreciate the time for your time.
Thanks for having us.
Always enjoyed talking to you. Appreciate it.
Thanks, Travis. Take care.