Good afternoon, everyone. Let's get started. This is Greg Siegenthal from Credit Suisse and it's my pleasure to introduce Michael Arangeti from Ares Management. Michael is a Co Founder of Ares and also the firm's CEO, President and a Director. We also have Ares' CEO, Mike McFerran joining us too.
Guys, thank you so much for joining us.
Thanks for having us. Excited to be here, Craig.
So just a quick background before we start, Ares is one of the largest alt managers in the world with $180,000,000,000 of AUM and over 1400 employees. They are best known for their industry leading global private credit business and their leading public traded BDC Ares Capital. The firm is headquartered in L. A, but has offices that span the globe, including in Europe and Asia. Okay, let's begin the fireside.
And let's start with your U. S. Direct origination business, which is the largest
in North America.
What do you view as your competitive strengths and what is your plan to keep growing this business? Sure. So I'm going
to take a step back and maybe give a global perspective before I drill down on the U. S. And I think you're hitting on something very important in alternatives, which is the real key to value creation over time and sustainable growth starts with building deep origination networks in local markets. And the reason for that is a couple of fold. 1, when you build deep relationships in the local market, you see more deal flow and as a result, you can be more selective.
So what we've noticed over time, the broader we build our origination teams and engines, the more selective we can be in coming through our pipeline. And through that selectivity, we think that we drive better investment performance. 2, what it allows you to do is in building those relationships, control more of those assets and company relationships for longer. And as I'll get to in a minute, what that does is it extends the life of those relationships and you monetize them over a long period of time. And it allows you to create investment product off of that relationship to meet the needs of the investor.
So it's a great place to jump off because so much of the value proposition to the client, whether there are investors or investees starts with that origination. And I think we were early in the understanding of that. A lot of folks in the alternative asset management business started in private equity and really weren't about building these broad based local networks or we're coming at it from the leverage finance side and we're probably more used to thinking about sourcing from desks and banks. The folks that started our private credit businesses were really coming out of banks and knew just how valuable it was to develop that relationship network. So going back to the start of our U.
S. Direct lending business in 2004, started off with a very large commitment to building offices around the country to drive that origination advantage. And so where the business stands today, we have about 150 investment professionals just in that core direct lending origination effort and probably another 50 in our alternative credit and asset based lending business. And what that's allowed us to do is build a very deep track record of investments. So we've put out well over $75,000,000,000 in 1,000 transactions since we founded the business.
We've probably transacted with over 500 private equity firms, many of them multiple times and we actively cover probably 650 of them. So through that origination, you build scale and then you get into this really, really virtuous cycle of scale, creating the ability to invest in origination, creating outperformance, creating your ability to raise more capital and so on and so forth. And so what we have seen is as we've invested in origination, and we surround that origination with a broader product set, we're capturing more share and we're capturing it in unique ways. And in our more mature businesses like U. S.
Direct lending now, the value of that incumbency is significant. 50% plus of the deployment that comes in that business today is from existing relationship. So I'm glad you started there, because I do think and I'm very proud of what the team has built in the U. S, but we've taken that playbook and we've exported it not just into other parts of the world like Europe and Asia where we've built Pan European and Pan Asian office and origination footprint, but we've done it in other product sets as well. So what we learned in the early days on the corporate side, we've been able to export into our real estate lending business.
We've been able to export it into our alternative credit business. And then you start to get synergies across the different product types in the local markets as well and there's an amplification effect. So it's there's a really big competitive advantage there on the origination front and I think that's been one of the big value drivers here
for us. Michael, I'm glad you brought up Europe there
because you do have a very large business in Europe. I mean, how do you look at the European business environment and how is it different than the U. S. In terms of competition, maturity, how you interact with clients?
Yes. So Europe, I mean, maybe stating the obvious, Europe is a collection of countries with different cultures and different bank regimes, different regulatory frameworks. So if you really want to succeed in Europe in the private markets, you have to be pan European, both in order to do a catch for the local market and the cultural nuances, but also to understand the structural requirements of those markets. So similar to what I just described and how we thought about building the U. S, as we built out our European capability, we focused on building out that pan European footprint.
So now we've got people in London, Stockholm, Frankfurt, Paris, Madrid, Amsterdam, and that allows us again to source locally, whereas I think a lot of folks focused on London or at least historically focused on London and expected the flow to come to them. I think that's fundamentally a different approach. Because Europe is so dispersed, obviously, the different countries are experiencing different pace of recovery and there's different competitive dynamics in each of those markets. So without going into that, I'll make a general statement, which is the European private markets are less evolved than the U. S.
Markets for sure. That's a combination of historical bank positioning. It's also a function that there are still a lot of SMEs, middle market companies in each of these jurisdictions. So the size of the opportunity is probably more fragmented and it's just taken a while for the capital formation and the investment infrastructure to catch up to that, but it's accelerated. So to put that in perspective, when we started our private credit business in Europe in 2,006, 2007, the idea of a scaled non bank or institutional lender taking care from the bank was unfamiliar.
Culturally, sponsors and companies were not accustomed to borrowing outside of the banking system, post the GSE, everything changed. And the combination of banks derisking, banks pulling back into their local markets, banks pulling back on liquidity really opened up those markets in a way that allowed us to accelerate. And I think a lot of our peers felt that post GFC, the bank derisking would create a massive asset transfer in the secondary market and form capital around big NPL opportunities. We did that as well, but what we experienced was what really did was create a gaping hole in the primary market for self originated credit as the banks were effectively frozen. So if you look at what we've been able to accomplish there, similarly, we've built out a 65 person front facing origination and investment capability across the region.
And we have scaled that to be a very sizable business culminating in, I think you saw Craig, our fund raise for our 5th flagship fund in Europe that is approaching an $11,000,000,000 pool of capital, which I think is indicative of how significant the opportunity set there is. So Europe less evolved, less mature. I think that means that we probably have more opportunity to exploit country specific and market specific opportunities there. And our expectation is it will continue to evolve along the lines of the U. S.
Market has, but we're not quite there yet.
So we know direct lending is your biggest business in Europe. But if you look at the other businesses that you have, remind us what you're doing, their growth trajectory? And then what are the major product gaps today in Europe that you can look to fill?
Yes, I'm glad you asked that. So our European private credit business is by far our largest, but all of our capabilities reside in Europe now for the most part. And one of the ways that we think about growth is we extend into new geographies and product adjacencies off of some of our big core competencies. So
if you
take direct lending, build a big capability and strategic roadmap on how to run these businesses at scale, export it to Europe, build a big playbook around commercial real estate lending in the U. S, export it to Europe. And so a lot of what we're doing in Europe now that we have such significant presence across the region in assets under management is we're slotting in product that we're quite good at in other parts of the world into the European market. So we're scaling our private equity teams. We are scaling our opportunistic credit teams.
We're scaling our alternative credit teams. But we're doing it from a position of strength and deep relationship in the local market. Our 2nd biggest business in Europe and people probably don't appreciate this is real estate, real estate equity. And Ares is probably one of the longest tenured, I think, one of the better performing European private equity businesses and we have the full spectrum of capability there and 20 year track record of investment. That's positioned us again pan European to start to feed other product into those teams and continue to grow.
So we're bullish on the opportunity for Europe given what we've accomplished there so far.
So let's move on to Asia. We all know you made an acquisition in Asia recently. I want to see if you could provide us an update on what exactly you're doing in Asia and what are the product holes and the geographic holes and how could you look to fill that?
Sure. I like the way you're taking me, because what you're going to see is a picture emerge of this geographic expansion eastward from LA to New York to London to now into Asia. And the reason for that is we're following the development and maturation of these markets. And really in order for us to build the businesses that we're used to building, we need to see a lot of things line up, right. We need supportive capital markets, supportive regulatory names, we need supportive investors, we need to be able to find the talent to execute, etcetera, etcetera.
Asia for us is a big focus of growth. Number 1, because of its current but expected contribution to global GDP and 2, to its current and future contribution to alternative asset allocation. So we've been in Asia for over 10 years largely on the growth equity side. We had a view that as these markets are developing that we needed to be bigger and we needed to be more diversified both by geography and by product in Asia. And that's what led us to make the acquisition of SSG in July.
And it is going as well as we could have expected, if not better, in terms of the cultural fit, the quality of the integration, the deployment and the performance there. So while it's still early into that partnership, it's going about as well as we could have hoped. Similar to Europe, we talk about Asia as a thing, but it's really a collection of countries each in different phases of development. And what attracted us to SSG and what we're leveraging there is we have on the ground capabilities in China, India, Hong Kong, Indonesia, Australia, so on and so forth. That footprint going back to the earlier comments sets us up in those local markets to build relationships and feed product and create investment product for our investors.
So we are leading right now with private credit with an emphasis on distress. Sometimes it's better to be lucky than good, but to buy a distressed credit platform going into a global pandemic that served us well. And so the returns in 2020 will set us up, I think, for some pretty healthy fundraising in that strategy later this year. But we're now helping to take that private credit capability, move it into some of the more developed markets like Australia and New Zealand, but then also unpack some of the historical capability in places like real estate lending and infrastructure lending and broaden out the product set. So the core business is performing exactly as we hoped it would and our opportunity to broaden the set is already accelerating.
But you have to take a long term view there. Obviously, that's a developing market. The private markets are not nearly as evolved there as they are in the U. S. And Europe, but we feel that our timing is right to try to develop a leadership that can never say that we have in the U.
S. And Europe.
Great. Let's move on to investing. So maybe remind us how much Stripe, how do you hold today? And then I know you get this a lot and I'm pretty sure I know the answer, but are you worried about deployment with that dry powder and with existing funds that are raising just given where valuations are today across especially public markets?
So we have about $56,000,000,000 of dry powder, which may seem like a lot to you. But if you look at the evolution of the company, you'll generally see that we run with roughly 25% to 30% of our total AUM uninvested. And that's both by design in terms of trying to capture multiple vintages and pace our deployment, but it's also structural just based on when we start raising new capital in a fund series or a strategy relative to the prior funds. So regardless of when you took the snapshot, you would see that. And I think that's important because it's not as though the growth of the dry powder is outpacing the growth of the platform.
2, what we've historically said is we would expect to execute on that dry powder usually in a 2 ish year timeframe. And sitting on the $56,000,000,000 last year we put out in excess of $20,000,000,000 if so the prior year. And being able to deploy as well as we did last year gives us confidence that that's the right amount of dry powder and we have the right balance intention between uninvested and the available market opportunity. Look, the valuation environment is high. Obviously, you have to separate, as you mentioned, the public markets from the private markets.
The public markets, both debt and equity are not the real economy. And so while we are seeing the impact of low rates and lots of liquidity impacting both valuations and returns in the private markets, not nearly to the same extent as we see in the public markets. But one of the ways that we participate in that type of an environment where the public markets are signaling something different than the privates is we lean into the public markets to monetize portfolios and we lean into the debt markets to better finance and create ROE and arbitrage in our debt books. But not surprisingly, you've seen us accelerate monetization of our PE portfolio into the public markets with a lot of success over the last 18 months. You've seen us accessing the CLO market in our commercial real estate business that had incredibly well structured firm seeing us active in the capital markets on the BDC that you referenced earlier.
So there is a put and a take in terms of what it means when you see high valuations, but what it also means you can do to structure performance returns for your investors. I think it's also just a basic reflection of the fact that the risk free rate is low. It's 0. So viewed through that lens, even if detached from what we all were used to thinking about forward earnings, it makes sense. And so we have to keep that in mind when we're thinking about it, thinking about the excess return that we're able to generate and that's to be viewed through the lens of the rate environment that we're in.
One other thing I would mention, because I think it's important is as the platform grows and diversifies, we obviously have the opportunity to deploy in liquid markets and illiquid markets and that's really been a hallmark of the firm is the ability to pivot and identify where the best relevant value is. But we're also now diversified by stress and distress strategies in a regular way, slow lending businesses, high grade fixed income alternatives, sub investment grade fixed income alternatives. So with that broad product set, we're able to deploy really in any market environment and you're seeing that come through in both the breadth and consistency of the deployment. What's unique about the market we're in now because of the nature of the crisis and the nature of the recovery, we're actually balanced in a way that we haven't been before executing in what I would call the non COVID regular way part of the market, but also the COVID impact and distress side. So it's actually a rare deployment environment for us.
Typically, this floats to the depth of the prices, we're going to be much more disproportionately exposed on the distressed side, whereas now we're finding a pretty unique opportunity to put capital to work both distressed and regular way, which I think bode well for the deployment picture for the foreseeable future.
Interesting. So Michael, let's stick with investing for a moment. And don't give us any of your secrets, but when you look across all your businesses and as you just said, there's sort of the COVID distress side, there's the normal sort of regular way side. Where are you seeing the most attractive opportunities global to invest? And I think about it, where are the potential IRR is the highest versus sort of what your target range is?
Yes. It's a hard question because investors come to us for different solutions, right? So we may have an insurance company client who wants investment grade rated private ABS and we can deliver that to them at an excess return relative to the liquid market equivalent that's attractive to them. And we can invest deep into the private equity market and the distressed market generate really high rates of return. So one of the value propositions to the investor dealing with Ares is you can access different geographies, different markets, different products and different risk return.
So it's not as simple as saying flashing green light in one part of the business. I think we've been fortunate that back to the origination, we're seeing quality flow in all of our businesses right now. Maybe as a general response to your question, the places where we are able to exploit some kind of a capital inefficiency or some kind of a capital markets uncertainties is clearly where we're seeing the highest return. So those are places like our special opportunities business, our distress for control private equity business, our alternative credit business, where we're taking advantage of some of the lingering stress, the stress or structural challenges in corners of the capital markets, that's where you're going to see the highest absolute rate of return and probably the highest risk adjusted rate of return. But again, the appetite that the global investor community has for the core 8% to 10% private markets debt opportunities we put in front of them is pretty strong as well.
And so it's hard to say that they're comparable.
Got it. We wanted to spend some time on your flagship funds. So we think of the ACOF series, European direct lending, U. S. Direct lending, update us on these funds, where they are in terms of deployment and where they are in terms of timing of potential future fundraising, please?
Sure.
One thing, I'm just going to I'm going to zoom out for a second just to contextualize it because we've been getting the question in some of our one on ones, I thought it'd be helpful just to bring it forward. We raised from our institutional investors last year about $41,000,000,000 in 15 to 20 commingled funds. And on our recent earnings call, we said that based on the pipeline of funds in front of us today that we think that we could come close to that, if not do the same. And I think that some people were taken aback by that, because there was an expectation that the way that this business works is you have these fundraising super cycles and then there's a lull and then you kind of come back. But what we're experiencing now is because of the diversity of product and because of some of our non institutional fundraising, we're actually smoothing that growth in terms of the asset gathering and the law of large numbers is starting to kick in so that we would expect going forward to see less variability year to year.
And there's really 3 components to that. One is the non institutional capital raising. That's things like SMAs and strategic partnerships, CLOs, open ended funds, our public funds like the BDC, the mortgage REIT, etcetera. So that's been a pretty consistent and healthy amount of capital per year. The second bucket, which is what you're asking about is just the flagship funds.
But while we can get funds into the market quickly and clear them, they don't typically get completed just in 1 calendar year. So if you look at what we had in the market in 2020 and what we have in the market today, we had our 5th European direct lending fund, which is as you call it a flagship fund. We had raised about $9,500,000,000 in that fund against a hard cap of $11,000,000,000 and that's continuing to go well. We had raised about $2,000,000,000 for our 2nd junior direct lending fund that's still the market. In 2020, we had raised about $4,100,000,000 in our flagship ACOF product, that's still in the market.
We raised about $3,500,000,000 for our SOF product, which was through the initial hard cap in 2020. And as I mentioned, the returns and deployment there have been great, so that's probably going to come back as a pledge fund a lot earlier than we originally would have expected. So without going through the long list, what's important when you think about the trajectory for fundraising in 2021, there's going to be a cleanup of the flagship funds that were in the market 2020 as they push to a final close. And that's not an insignificant number. And then 3rd will be the new product that finds its way into the market, things like our 2nd opportunistic fund, our 6th Asia distressed fund, our 2nd U.
S. Direct lending strategy. And so all of that will then carry us through the back half of the year and into 2022 where you'll see a similar dynamic. I think it's important though that folks appreciate from a profit generation standpoint, we are not necessarily reliant on the pace of fundraising in any given year because most of our dry powder pays us on investment, not commitment. So when you actually think about the trajectory of our FRE growth in 2021 2022, back to your deployment question, what's really going to drive that ramp is going to be deployment of that $56,000,000,000 of dry powder, not necessarily the capital we raised.
So while we're very focused on continuing to drive the core fundraising engine forward from a P and L standpoint, most of the P and L development over the year or 2 is really coming from things we've already done. And I think that's an important thing for people to appreciate because historically with some PE centric models, I think there was a view that fundraising equates to more immediate profit generation and our model is a little bit different.
So, Michael, I want to move on to your strategic initiatives and I think we all think about a speed insurance. So what exactly does that business look like today and what are you trying to do with it? But also you have some other strategic areas that are in focus. So maybe if you could highlight those for us too that'd be helpful.
Yes, happy to. A SPEDA is our growth vehicle for our affiliated insurance business. We have been growing our insurance solutions business for the last 7 or 8 years and that's included our 3rd party asset management for insurance companies, which raised about $25,000,000,000 plus or I think 130 insurance companies and that's been a big focus. Off of that core LP base, we've entered into a number of large strategic partnerships with some of our core insurance company clients around parts of our private credit business that have been scaling and really productive. It includes things like our IDF product and the growth there.
And the only reason I'm taking a step back is Aestheeda is one part of a very large insurance solutions practice and vision about how we create product for the insurance market, whether it's affiliated insurance or third party. Our vision for our insurance business is to grow Astrida, but not to have it necessarily overwhelm our 3rd party asset management business. We think that it is important given what we do for a living that we strike that balance between serving the needs of our core clients and serving the need of our affiliated entity and trying best we can have them working together to bring more solutions into market. So where the Astrida business sits today is we've laid out a longer term strategy to have a reinsurance business and an annuities platform sitting side by side, growing organically, if you will, through the sales of fixed index and fixed annuity product and then growing the reinsurance through flow agreements and inorganic growth. And that's really where we're executing today.
A big boost to that strategy was the closing of the F and G REIT transaction at the end of the year. That got us much more active on the M and A front on the reinsurance side. It's now come with a significant bump in investment in talent and people and I think you'll continue to see that progressing throughout rest of the year.
Great. At this point, I
just want
to let the audience know that if you have any questions, you can find Samantha Platt, her email, below your Zoom screen. So if you can see it, just just shoot her an e mail and we can see if you have any questions, we can ask them live. But Michael, let me jump on to FRE trajectory, which is something I think that that's the most important when you think about buying your stock today. So what is the FRE trajectory at Ares given, I would say number 1, your really big shadow AUM balance, which will get invested in kind of maybe 2 or 3 years, but also you have pretty robust future fundraising prospects. And then I would say thirdly, you're going to probably improve the FRE margin, so kind of 3 pieces there.
Yes. Mike McFerran, you want to take that one?
Sure. Happy to. So Craig, I think Mike touched on where you just went probably the biggest near term element is we have over $37,000,000,000 of AUM available for deployment today. It's not yet paying fees. And we'll get paid as we deploy it.
So every day as we put dollars to work, that's adding to our top line revenue growth. That $37,000,000,000 is about $400,000,000 The management fee is tied to it. So when I think about the next couple of years, I think Mike highlighted this, the fundraising we're doing today and the business builds today and the strategic expansion of the firm feels more like it's been a really that's kind of a couple of years out as far as how it impacts the longer term trajectory. So much of that's going to be revenue growth for 2025 and beyond. The next 3 years is heavily driven by the capital we have, which we're adding to.
We said on our earnings call and we've reiterated this a few times, that we continue to grow FRE annually and more a year. And I think
if you look at the
last several years, we've continued to see down that. We've pegged the dividend to our expected FRE growth, which we increased 17.5% for 'twenty one from 2020. And to the viewpoint, Craig, what's complementary to all that, in addition to revenue growth is the margin expansion, which historically grew between 150 basis points and 2.50 basis points a year. The Q4 was a 37% margin, for the full year 2020 it was 35%. And it was 3 years ago, we were in the high 20s.
So we're continuing to see as the business puts capital to work, achieve scale and brings in revenues, which frankly are for on products that we already have capabilities around, that revenue coming in is coming in at a much higher margin than the business operating side. So that's why you see this linear growth of the margin and that's why we feel with high conviction we're going to hit a 40% or better margin by the end of 2023.
You make it sound so simple, Mike.
That doesn't sound complicated.
I hate to say it. You make it simple, I count it. So there you go. No, but it's I mean, the good news is, I hate to say it, to Mike's comment on simplicity. I mean, that is what we think is so nice about our model being management fee centric that has most of our management fees, and by most, I mean, 90% and more coming from permanent capital vehicles, long dated locked up of funds, strategic mandates.
So that makes my world easier because I'm able to look forward with great visibility on revenue growth off the capital we have without really much that can disrupt it. And what I mean by that is our revenue is very insulated against what you would consider as more of the traditional risk in asset management of redemptions, market value declines. Most of our capital pays us on committed or invested or on illiquid asset values or and most of our capital is locked up or permanent. So we don't go through that double jeopardy of in strained markets. You've got redemptions and falling NAVs that you're going to reduce management fees on a reduced base from.
That insulation of our model enables us to really be able to at least see, if nothing else, what your run rate management fees is. No, that's insulated. And then you're less anxious about what offsets could happen against your equity.
Last question. And Mike, I think you just hit on it a little bit, but maybe explain to investors your dividend outlook, how do you expect to grow the dividend? You want to grow FRE by more than 15% plus a year. Does that mean the dividend should grow by more than 15% plus a year? And also, you have a nice fixed dividend that's also high, something that I think a lot of loan loans are attracted to.
So maybe just update us on the dividend.
Sure. So going back a bit, Craig, when we made the conversion to a corporation in 2018, we rolled out what we called our capital management policy, which was we were going to peg the dividend growth to expected fee related earnings growth. You weren't tying it to any X number of quarters because we didn't want to get into that look back, 3 quarter, 4 quarter test or a fixed forward looking test. But perhaps that's why we use the word peg versus saying a percentage payout because known as crystal ball, and I think in some years, you may pay out more than FRE, some years you may pay out less, but it should probably over longer term hopefully be pretty close to it. But we've paid the dividend to FRE for purposes of continuing to create strategic capital to grow the firm.
We're going to we've said we would retain effectively the non FRE portion of our earnings being performance fees and our balance sheet income. I'm going to use that as retained capital to reinvest, which drive further FRE growth long term. So in simplicity, as you think about the dividend, if you expect the dividend to be a reflection of expected after tax FRE growth, then if we're expecting to grow the firm 15% or better a year for 4 years, I would think that it's reasonable to expect the dividend would follow suit. And again, this year, we increased to 17.5%. We like that level dividend model because we think it's transparency and it's frankly simpler than creating a variable dividend framework, which I think was a hallmark of the industry yesterday, pre corporations, when you kind of have these variable distributions that were all based on the timing of realizations.
But our management fee centric model really lends itself to going back to my point of the insulated nature of our revenue and the visibility we have it, that really supports rate predictability of our revenue and in turn our ability to pay out a dividend and grow it.
Great. Well, with that, we're out of questions. We're out of time. Michael, Mike, we just want to give you a big thanks on behalf of all of us at Credit Suisse. And we're hoping next year we'll get to see you in person in Miami.
So guys We are too.
We'll look forward to that.
Thank you so much. Good spending time with you.
Bye, guys.
Take care.