Good morning. I'm Patrick Davitt, the U.S. Asset Manager Analyst here at Autonomous. It's my pleasure to welcome back Ares Management CEO, Michael Arougheti. Thanks for coming back and spending your summer Friday with us. As a reminder, if you want to ask any questions, you can submit them through Pigeonhole, and they'll show up here on my iPad, and I'll try to work them in as appropriate. Mike, given we have had most of the major alternative manager CEOs here this week, I'm starting all the conversations with similar high-level macro questions. Given your position as one of the largest credit managers, I think it's best to start there. I'm sensing from investors' concern that stickier inflation higher for longer, slower economic growth could be a particularly bad mix for levered risk assets. What's your updated thoughts on that concern? Do you agree with that concern?
What's the latest thinking on inflation rates in the economy within Ares?
Sure. Good to see everybody. I also appreciate you spending your summer Friday with me.
Absolutely. Of course.
Look, we have a pretty good lens into the real economy globally through our direct lending franchise. We touch probably 3,000 middle-market companies around the globe. Through our industrial logistics business, we manage 600 million sq ft of distribution centers and warehouse assets, and generally have a good sense for flow of goods. We have a $40 billion alternative credit business that has a pretty good lens into the consumer. When we're asked that question, we always just kind of lean into what it is that we're seeing in the portfolios. I would say, broadly speaking, the portfolios continue to be incredibly strong and resilient. We're seeing positive NOI growth, positive EBITDA growth, deleveraging, consumers proving to be resilient.
I do have a view that inflation will be more persistent than maybe people want it to be, and that rates will generally stay higher for longer than people want them to. I'm not in the worldview that we're in a world of stagflation. I think that the fundamentals in the economy continue to flash strong. We're at or near full employment. I think when people are employed, they spend money. Markets are happy right now. I'm cautiously optimistic that despite a lot of the volatility that is poking its head up, what we're seeing in the portfolios tells us that the fundamental strength of the economy is intact.
Great. In that vein, private credit and direct lending specifically appears to kind of always be in the press's kind of target for whatever reason. What do you see the biggest risk of something breaking in these portfolios? On the other hand, how off is this concern, and should the attention be focused somewhere else entirely?
I've been in the private, what is now called private credit, but the direct lending private credit business for 30 years. The business has always been in the eyes of the media one headline away from blowing up the economy. I don't understand where that comes from. I always just try to remind people what it is that we do and why we exist. If you think about direct lending, private credit, we're not taking risks that other forms of capital won't take. We're taking risks that other forms of capital can't take because of some regulatory capital constraint or some balance sheet constraint that kind of doesn't make it profitable for them to do it.
If you actually look at the borrowers that we tend to lend to, they tend to be the highest quality borrowers because they are able to take on leverage, and they tend to be supported by institutional equity. If you take direct lending just as one example, but directionally it would be the same for our real assets portfolios, our corporate direct lending portfolios today sit at 42% loan to value, which means that there is some institutional equity owner that owns the 58% of the balance sheet that we do not. What I always try to gently remind people is if you actually have concern that there will be losses in the private credit market broadly, then you have decimated the private equity industry.
Generally speaking, if you've decimated the private equity industry, we're all going to be pretty unhappy with what we're seeing in our public fixed income and public equity portfolios. I know this is going to sound completely biased, but private credit is almost the last place that you're going to start to see losses. If you look at the history of the asset class, the direct lending indices, like if you look at the Cliffw ater Direct Lending Index, it's actually outperformed the loan and bond index over the last 20 years in terms of default rate and actual losses. It's not to say you're not going to see idiosyncratic portfolios having higher loss rates, but I think the structure of the market, given the LTVs, given the high margins, given the growth in EBITDA that we're seeing, I just don't see it.
On this point, there's also some reporting about the dynamics between the broadly syndicated market and direct lending. A concern, I guess, is that when the BSL market is open, the relative credit quality shifts from direct lending to BSL. In other words, higher quality companies can refi out into BSL and vice versa. It seems rational, but probably too simplistic. What is that idea missing?
The direct lending market, corporate direct lending market relative to BSL is effectively always open. It's always open from the lower end of the middle market to the upper end of the middle market. When the BSL market is turned on, it will start to capture share at the upper end of the middle market. There is a size constraint in terms of the types of companies that are eligible for access to the loan and bond market. If you look at $100 million of EBITDA, for example, as a threshold, that's probably the minimum required size to get into the liquid markets, and it's probably higher than that. Yes, you will see the BSL market trading share with the direct lending market, but that only represents a pretty small fraction of the middle market universe.
One of the things that we've tried to articulate that differentiates Ares relative to the broader peer set is we actually have deep origination across the entirety of the corporate middle market. And so if you do see relative value shifts between the larger end of the market and the lower, you can move back and forth, and that's generally how we navigate the cycle. But it's not as though when the broadly syndicated loan market is open, there's a change in underlying quality in other parts of the market.
Great. That's helpful. Another one, that kind of tug of war between BSL and direct lending. It's been pretty volatile this year given the volatility around Liberation Day with big direct lending gains in April, then BSL coming back in May. Looks like there've still been some big direct lending deals over the last few weeks, though. Where are we in that balance now? Through that lens, how's your pipeline been tracking since we last heard from you?
Yeah. We were just talking about this before we came on stage. People access the direct lending market generally because they're looking for certainty of execution, creativity in structuring, a partner that can help grow with a business plan, people who can partner with them in good times and bad times. People need to understand that people are not coming into the private market because the public markets are closed. They're coming into the private market generally because they're just getting a better experience. I think a lot of people who have been in the liquid market have learned over time in down markets when someone can come into your capital structure and accumulate loans or bonds at a discount to par, that's value destructive if you are the owner of that company.
There is real value that gets created by having a bilateral agreement with a partner that you trust. Again, back to kind of the myths of direct lending, it is not as though BSL is open, direct lending is closed. Private markets are taking share because they are delivering a value proposition to the client that they want. In terms of where we are, we talked about this on our last earnings call and ARCC's earnings call as well. We had a very, very active Q1. Post-April 2nd, the pipeline kind of froze in place. I would not say that it went away. I think everybody froze in place as they were hoping to get some certainty on the direction of travel.
I would say now that we're kind of past peak volatility and people at least can begin to underwrite some range of outcomes here, we've seen the pipeline turn back on, and we're quite busy. Important to note too, obviously Ares does a lot of things other than direct lending, although people love to talk about our direct lending business.
We'll get to the other stuff.
When the direct lending market is closed because there's not a lot of new transaction volume, other parts of the business turn on pretty dramatically. If you see a slowdown in volumes, you see a pickup in secondary deployment and opportunistic credit deployment and bank SRT deployment and all of these things. Generally, when we look at deployment pipelines, they tend not to be erratic because we have a diverse enough set of strategies and solutions for the market that the deployment is pretty consistent. It just changes where it is that we're deploying.
Fair. I'm going to stay with direct lending a little bit longer. I promise we'll move on. The other side of kind of the deployment equation is the deployment spreads, right? What spread you're getting on the new loans. I hear a lot from investors this concern that there's just so much private credit dry powder that the spreads will tighten so much that it becomes a headwind to your revenue yield. What are they missing? And more specifically, how have new deployment spreads been tracking through the recent volatility?
Direct lending, private credit generally, not just corporate, is a pretty durable return proposition because it's short duration, floating rate, and has a lot of different return components from upfront fee to credit spread to call protection to exit fees and everything in between. While credit spreads fluctuate and base rates fluctuate, you generally have a pretty narrow range of total return that the market requires. That total return is typically 150-350 basis points wide of the liquid alternative. You have to think about direct lending relative to the liquid markets as opposed to just what's happening in the direct lending market because it's not an unchangeable total return. In terms of what we're seeing in the market, came into the year, markets were healthy. Credit spreads had tightened pretty dramatically.
Post-Liberation Day, spreads probably gapped out 50-75 basis points and fees gapped out maybe 100 basis points. Fast forward to today, that 50-75 is probably plus 25. It is still wider, but we have given some back. If you look at what that means from a total return standpoint, people are still generating kind of a 10% return, give or take, in the direct lending asset class, which on a relative basis, given the rate environment we are in, is incredibly attractive. Not surprisingly, still seeing a significant amount of investor demand for the asset.
The gross-to-net headwind was better than expected in 1 Q, given how open the markets. I think, how has that been tracking in 2 Q?
I can't give you an update on Q2, but back to the diversity of strategy and the way the portfolios perform. When M&A markets are robust and there's a lot of new transaction and refinancing activity, volumes pick up, but your gross-to-net goes down. When the market's slow, your net deployment is elevated just because you're not getting refinanced out. If you look at Q1, I think our gross-to-net was like 49% and Q1 of 2024 is probably half of that. People love it when the markets are healthy and there's a lot of transaction activity, but we probably perform best when it's okay, but not great in the sense that you're not having to defend the existing exposures and you have ample deployment opportunities, but your gross-to-net is improved.
It feels like we're kind of in that similar type of a market backdrop where the markets are happy, volumes are picking up, but it's not quite as exuberant as maybe people underwrote coming into the year.
Yeah. On that point, given this is a more generalist conference, I sense a lot of investors that are not as familiar with how direct lending works through cycle do not really understand how you can pivot and how the deployment pivots. If we are indeed heading for more credit stress, slower deal environment, I think it would be helpful to get a quick primer on how your direct lending business can pivot and still deploy even when maybe net new M&A activity is not as high.
Sure. There are two. If you look at recent, if you look at 2024, I think the U.S. M&A volumes were down 7% and our deployment was up 61%. That is a reflection of a couple of things. Number one, our companies are growing their EBITDA generally somewhere between 10%-12%. Publicly announced, you see that. Just the compounding effect of the EBITDA growth and the re-leveraging of the existing portfolio creates a natural cycle of deployment that exists away from the M&A market. That is a big compounder, right? If you think about a direct lending business that is growing 15% plus a year, half of that plus is coming from just the compounding effect of EBITDA growth within the portfolio. Importantly, the incumbency advantage that we have within the existing portfolio is a big driver of that as well.
About 50% of our deployment in any given year is coming from within the existing portfolio. That is a function of just these companies doing tuck-in acquisitions, investing in growth, etc., etc. That is a big part. The second piece is, and this is back to the loan-to-value concept of sitting at 42%. If the market is stressed or distressed and someone owns 58% of the capital stack, they are incentivized to own that company and support it because effectively you have a call option on the equity because you are a senior lender at 40%.
What winds up happening is you get into a negotiation, which is why people want to be in the private market, between the lender and the borrower that says, "Who's going to put money in and what do you get paid to do it in order to protect enterprise value?" Generally speaking, if the company is a high-quality company but is having either liquidity issues because of rates or some modest operational distress, the equity will come in with new capital, de-leverage the capital structure. It actually reduces risk to the credit and asks for some form of relief to extend runway. If we, the lender, put money in, it comes at the top of the capital structure. It goes from 42% to 45%, but then you're getting equity-type returns for that exposure.
Generally speaking, the combination of de-risking, right, from capital coming in or re-risking where we're getting paid excess return to move modestly down the capital structure leads to outperformance through cycle. One of the things we talk a lot about is if you look at ARCC as our publicly traded BDC, which is a pretty good proxy for how private credit performs through cycles, their since inception loss rate is plus 80 basis points. That is a function of the way that the portfolio kind of operates through the different parts of the cycle. Again, this 42% is as low as we've ever seen it. I have high conviction going into this cycle that even if we were to get a modest credit cycle, the portfolios are more durable than they've been in any other crisis before.
To the extent you have had loans that might be a little bit more stressed, you're seeing the sponsors aggressively trying to keep and step in and put more credit?
Generally, they will. Yeah. If they do not, it is because they perceive that equity value does not exist anymore, in which case we now are moving into the equity. If your underwriting is sound at the outset, generally you recoup value by taking those companies over. We would never go into a loan wanting to own the company, but it is something that happens. When we do, we actually tend to make money in those situations.
Right. So with all that in mind, it sounds like you'd actually like a little stress in wider spreads. What do you think the sweet spot is there to where?
I don't know if that's a little stress. I think it's ironic. I mean, the private credit probably performs the best in slow to low growth environments where rates are stable and deal volumes are active but not ripping. It's kind of like a Goldilocks market, whereas I think the liquid markets love it when the markets are ripping because there's just a lot of velocity of capital. I think we prefer it when it's just kind of somewhere in the middle.
Got it. Expanding the private credit window, you and others have pegged the ABS opportunity set as much larger, potentially getting to tens of trillions of dollars, which is largely on the inclusion of asset bank financed. I think you guys call it alternative credit. Your targets have been a little more conservative than others, but you're still expecting it to double over the next few years. With that in mind, how much of that $40 trillion do you really think is addressable for the alternative managers? What are the areas Ares is best positioned to stake its claim in that space?
Yeah. Look, we've been in the asset-based finance business as long as anybody. We actually started that business in 2006 at Ares and have grown it quite dramatically. It's approaching $50 billion today. The growth ambitions that I think you're referring to is at our investor day, we basically said that we would get it to $75 billion or $80 billion, which I think is a 15% growth rate. It is a large, untapped market. The reason it is getting so much attention now is really twofold. Post the GFC, the securitization apparatus on Wall Street fundamentally changed, and a lot of specialty finance companies kind of got disseminated into the market, and they're now either reconsolidating or are at a stage of maturity where they're borrowing in the private market.
A lot of folks like us and others have been much more aggressive in affiliating with insurance clients who have a very strong appetite for the rated tranches of the asset-based finance world. What we have done to differentiate is, number one, invested in capability and team. We have over 80 people now in that business covering 40 subsectors with a focus on what we would call sub-investment grade and investment grade. It is roughly 50/50, whereas I think some of our peers tend to be much more focused on the investment grade part of the market. We are trying to maintain balance. How much of it is accessible? It is theoretically all accessible, but I think it is pretty ambitious when people start throwing numbers from like $40 trillion because the insurance market is active. The bank market is active.
I think we shouldn't confuse TAM with market share capture, but it is a big TAM. Similar to what we've seen in other parts of the private credit market, there is a value proposition to the client that will have them borrow in the private markets in the asset-based market over time. I don't know how much of that $40 trillion transfers. I think in order to be successful in that business, though, you have to have a unique investment capability. It is quite specific and quite skilled. I think if you're not in the business now in a meaningful way, you're not going to be in the business just because the talent gap is too big.
Two, I think you need to be large because a lot of these transactions are multi-billion dollar type transactions, and you need to show up with a full capital solution. The large players in this market are, by definition, going to be the large managers like ourselves. Three, you have to be able to really move between the different parts of the market because in one part of the cycle, consumer lending may be interesting, and in another part of the cycle, fund finance may be interesting. You have to do all of those things in order to capture the excess return. I think it's going to be a small handful of players that have a full capital structure capability and a full investment capability that are going to ultimately win the day.
I think kind of counterintuitively, I've heard from a lot of other executives that the education process for the LP base broadly has been a little bit longer in ABS than it was for direct lending for some reason. Could you update us on that process and where you think we are in kind of unlocking potential?
I think we're on the other side of it. It's funny because when we, similar to what you say, 30 years ago when we were talking to people about corporate direct lending, they looked at us funny because they didn't understand what it was. I'd say even 10 years ago when we were talking about private ABS and ABF, they didn't understand what it was. I think part of that is the structure of the market used to be you had the securitization market and traded ABS. Then you had these little small, niche specialty finance companies that were doing things like premium finance or life settlements or litigation finance. The way the investors experienced asset-based finance in the private markets tended to feel really small, really specialized, really complex, really risky.
Part of the education process in the early days was really kind of, and we were out doing missionary work where we were showing investors cash flow curves across different asset classes. We would redact what the asset class was. We would say, "Here's 20 different portfolios of 20 different instruments, leases, receivables, consumer loans." They all look the same. We just tried to anchor people on the structure as opposed to the underlying asset because it's a lot to ask an investor to understand the 40 sub-asset classes that we specialize in.
We kind of reoriented the conversation from, "Let us talk to you about premium finance or healthcare royalties or fiber securitizations, and let us show you what these instruments are and how the structure ultimately protects you regardless of what the underlying is." That was kind of a light bulb moment because what it allowed the investors to do was to get out of the game of allocating small amounts of money to these specialty providers and kind of aggregate their exposure across the landscape of asset-based finance. The second unlock was when we and others started to show people rated tranches within these structures over time that brought the insurance companies and the pension funds into the market as well.
I think we're still in the early days of adoption, but I think from an education and understanding standpoint, I think we've made huge strides.
On this point, one of the large players in ABS is making a big push to make private credit more tradable. There's the new.
Then it's not private.
It is not private. Yeah. That speaks to my question. What are your thoughts on, I guess that is a big selling point, right, for the asset class that it is not as volatile as public markets? Why are they going down that road? Do you think it could kind of derail one of the selling points of private credit?
I think there's a lot of kind of cross currents at play right now around this conversation of private and public and convergence. The way I always think about it, and we talk to our investors this way, is you could take equity risk and you could take credit risk and you could take it in the form of public exposure or private exposure. Many of our investors do both. I think in order to invest in the private markets, people want excess return because you have less liquidity. You also have less volatility. People have come to appreciate that they can get excess return with a lot less volatility in the private market. My own view, and maybe I'm just not smart enough to get it, I think once you start trading something that is private, it's now traded.
Then it's not private anymore. That doesn't mean it's not still a really attractive instrument, but I think people are getting sucked into this conversation about definitional constructs that I'm not sure is relevant. The value in trading, which is maybe, I don't know if you were going to talk about this, but there is going to be an evolution and innovation in these markets where portfolios of public and private will come together and will have a need for daily, if not monthly marks, daily, if not monthly liquidity. The idea that you can begin to create bid-ask spreads around private assets actually benefits the evolution of the market into some of these structures. I think part of what's happening is the move towards trading private securities kind of goes hand in hand with trying to unlock value in these public-private partnerships.
I'm a pretty simplistic guy. I think if it trades, it's traded. If it doesn't trade, it's private. That's pretty straightforward.
Fair enough. I think that's a nice segue to a more recent concern we've heard from investors that bank deregulation could kind of derail this ABF opportunity. From what you've seen in the proposals, do you think there's anything that could derail the transition, I guess, from bank balance sheets to your wrappers in the ABF space?
Yeah. Another thing I think is heavily misunderstood in the growth and evolution of private markets is I think people have a view that it came at the expense of the banks. The reality is it came in partnership with the banks. While the private credit markets have been growing, the bank exposure as lenders to private credit portfolios, whether they're asset-backed or direct, have also been growing. Banks have been meaningful beneficiaries of the growth in the private credit markets. What has happened is rather than build large origination and portfolio management infrastructures to own whole loans, they effectively outsource that to the private credit markets and then lend to the portfolios. In so doing, they are generating significantly higher return on equity and doing it with a lot less expense. It is capital accretive as well.
I think that that structural shift is kind of intact and not necessarily going to change. Even if you look at what's happening in the world today, we and others like us have been meaningful partners to the banking community with SRTs and flow agreements where we're trying to use our differentiated capital to support the balance sheet needs and client franchises of our bank partners. I'm a huge proponent of bank-non-bank partnership. I don't think that this should be viewed through the lens of we're competing necessarily there.
It's not a zero-sum game.
I do think back, though, to this idea of specialized talent. This de-banking trend has been a 30-year trend. A lot of the practitioners have left the commercial banking system and now exist in the asset management world. I think it's going to be very hard to pull them back in just in terms of the products that they have, the compensation that they make, the ease of use in doing the business. It is not just you get a red cap relief and all of a sudden you're back in business. I think it's more complicated than that.
Talent has migrated. That's a good point. No one's made that yet. All right. Let's move away from credit. You and others have presented a very strong case for growth in infrastructure. Infrastructure is probably the biggest incremental opportunity right now if it's not credit. TAMs are really big. TAMs are being thrown around. You recently boosted your positioning there with the GCP acquisition. Maybe update us on how the integration is progressing. I know it's early. More broadly, how you see this boosting your broader infrastructure strategy.
Yeah. GCP, just for those who do not follow the company, it is an acquisition that we closed recently. They are a large global player in the industrial real estate market and have a significant data center development business that came with the transaction as well. The reason that we targeted that, if you were to go back and look at our investor day, you saw that we were focusing on expanding our presence in Asia. We were focused on expanding our capability in digital infrastructure. We were focused on continuing to deepen the vertical integration that existed in our real estate business in order to drive more value. The acquisition in many respects checked multiple boxes for us in terms of the strategic roadmap that we have set out for ourselves. About a $40 billion asset manager, half in Japan, half in the rest of the world.
Kind of the crown jewel asset of GCP is their Japanese real estate business, one of the longest tenured, best-performing J-REITs in the market, and one of the longest tenured industrial developers and asset managers. That was a real big opportunity for us to get a foothold in one of the largest economies in the world at a time when we think that the tailwinds for growth are as strong as they've been in decades. What also came with it was a deepening of our vertical integration capabilities in Europe and then the data center piece.
We acquired about 75 people and a pipeline of projects representing about 2 gig of data center development, $8 billion or so of AUM to be raised, and a really unique opportunity to leverage our now global position as probably the second or third largest industrial real estate manager to land bank and build pipeline for our data center business. It kind of checked a lot of things. The data center business too, from a financial standpoint, is quite interesting because we did not pay a lot for the option to build it, but coming out of the gate, we are actually absorbing a healthy amount of operating loss to support that development capability while we are ramping the pipeline. In terms of the progression of the profitability, as we are raising capital behind the data center development pipeline, the FRE will pivot pretty quickly.
As I understand it, that turns on as it's put in the ground, or is it as it's?
It's all along the evolution. One of the other things that will change for the presentation of the financials within our real assets business is you now start to get a significant amount of leasing, development, acquisition-type fees, and other income that is new to the company.
Another interesting spot now is secondaries. It feels like we might be entering a bit of a sweet spot there. Sponsors are struggling to sell positions. GP is feeling pressured to get more liquid. I think you have a relatively stronger position given your Landmark acquisition. Are you seeing those trends translate into significantly more deal flow yet? How is capital formation tracking to take advantage of that deal flow?
Yeah. No, it is definitely in the sweet spot of the market opportunity right now. Maybe to take a step back, we were always in the secondary business through other parts of the company, and we had been an issuer of continuation vehicles and GP-type solutions. Five years ago, we acquired a company called Landmark, which was kind of the pioneer in secondaries, $35 billion of AUM, if I remember when we bought it, with a view that secondaries secularly were going to go through a transformation, which was largely a shift from what was typically just an LP-led market to an LP-led and GP-led market. We were beginning to see that this just was not going to be pension funds selling portfolios. It was going to be GPs looking for creative liquidity solutions in the form of minority stakes, preps, loans, NAV loans, etc.
That has accelerated dramatically in terms of the addressable market. I think it speaks a lot to our strength in GP relationships. Now we're not just covering the GP community with loans, we're covering them with secondary solutions. We also had a view that the primary market for non-PE, i.e., real estate, infrastructure, credit, was mature enough that you'd begin to see a deeper penetration of secondary product in those markets. You were going to see LPs give way to GPs, and then you were going to see PE start to give way to other parts of the business. That has played out in space. In the five years since we acquired the platform, we launched a de novo credit secondaries business and are effectively helping to create a market that up until this point did not exist. Just raised our first fund.
We formed about $3 billion of capital there, and that's quite active. We have scaled our infrastructure secondaries business. We have launched a meaningful non-traded product into the retail market. The deal flow is accelerating rapidly because, to your question, the installed base of private equity and private real estate equity is so significant that in this deal environment, it needs other liquidity solutions that are not just selling. Secondary is a big part of that. Back to the earlier comment I made on deployment, if M&A is slow, or even if it picks up, there is so much installed equity in the market that the secondaries flow is going to be a pretty meaningful center of activity, I think, for the foreseeable future.
There's enough kind of demand from the LP and, I guess, retail now to support that deal flow, you think?
Yes and no. I mean, it's interesting because if you look at secondaries, industry-wide secondary deployment last year was maybe $160 billion. My guess is it will be higher this year. If you look at the dry powder in the secondaries market, it's probably close to that number. There is enough capital in the market to kind of satisfy, but not the way other markets are structured. I actually still think the secondary market is pretty undercapitalized relative to the market opportunity, which is why we're seeing the momentum we're seeing in fundraising and deployment.
Right. That's a nice segue into retail. You've been earlier in the wealth build-out than some others, but catching up quickly. This is obviously a big part of the growth algorithm for everyone in the space now. First, in the near term, there's still a lot of concern that the expansion into this channel could make alternative flows more volatile. What has Ares been experiencing on that front kind of post-liberation day? Any sign these products? On the other side of that, any sign that these products could potentially be something investors look at as something to rotate into when markets get more volatile?
Yeah. So again, maybe taking it just a quick step back, we were—I do not want to say that we were late to the retail game, but we were more measured in our enthusiasm by design. You highlight a couple of the reasons why, which is historically, when we raise an institutional fund, it has an expectation of deployment over three to five years. We can opt into a market or opt out of a market, and we can go into any environment with a significant amount of dry powder to kind of play the cycle. If you look at the history of Ares, even though the numbers have gotten bigger, we are typically sitting on 25%-30% of our total AUM undeployed. That is kind of a hallmark of how we think about investing.
That changes when you start raising capital in the retail market because you get a dollar, you invest a dollar. You do not have the luxury of knowing what your dry powder is and how aggressive you can be navigating a cycle. It takes away one of the levers we have to drive outperformance, which is to not invest, right? You do become more procyclical in the way that you raise money and deploy money when you go into retail. We wanted to be sure that when we did it, it was as a complement to our institutional franchise so that it diversified, allowed us to grow, but that it did not overwhelm our ability to play the cycle through dry powder.
As quickly as our retail business is growing, we are laser-focused on maintaining that balance because we think it drives outperformance in both of those markets just because of the durability of our performance and origination. In terms of the volatility, it's going to be interesting to see. If you look at what we're seeing now, we have not seen a slowdown in flows. Now, part of that could be that being that we're younger than some of our peers, some of these newer funds have meaningful financial penalties in the first 18 to 24 months of the fundraise. There is a financial disincentive for people to look for liquidity in our product specifically. It is still early because some of these have monthly and quarterly liquidity, and we have not quite seen the queue building.
When I look at the inflows and I look at the investor behavior today, real-time, I would not expect it. They are exhibiting a significant amount of resilience and durability in ways that we have not seen before. That is really encouraging because, again, I think historically there was a view that the retail investor was kind of exiting the market when they should be coming into the market, and it made it difficult to manage. We are not seeing that. I think a lot of the education that we and others have put into the wealth channel, just in terms of the durability and the value of the liquidity, seems to be taking hold. Flows are still strong. We are not seeing a lot of redemptions. We have eight products in the market across the globe, and it has been pretty broad-based demand.
It's not like we're seeing demand for one overwhelm the other. It's been pretty broad-based across the entire product set.
I sat in a lot of group meetings with your CFO and others yesterday, and this conflict between the retail wrappers and the institutional wrappers came up in almost every single one. Looking forward, if the retail opportunity really is as big as you and everyone thinks it is, how do you manage that conflict when flows to these products are three, four, five times what they are now?
I try to anchor people in private markets, which is important. There's a fundamental capacity constraint when you're building a private market platform, right? A talented private market investor can only do X number of deals a year, and they can't scale them. When you build the organization, you have to be thinking about building investment capacity, and then you build your fund portfolio to kind of meet the investment capacity. It's always great when we say that there's a $12 trillion opportunity in retail, but if you can't generate $12 trillion of unique investments for that market in the cadence that they need, it's not really a relevant number.
The way that we think about it, and I do not know how others do, is it starts with what do we think our actual investment capacity is based on the people we have, based on the capabilities we have, based on the capital we have, and then build and construct the capital behind that for the benefit of our investors and our shareholders. I drive quality growth, profitable growth, and do not sacrifice investment return. I think it is important that when you are thinking about alt managers, that you really focus on what is their investment capacity, not what is their fundraising capacity, because I assure you I could probably raise five times the amount of money than we could invest. You have to focus on building capability. I think what it means in terms of retail is there is a real role for retail. It is diversifying.
It is underpenetrated and growing. It allows for a healthy discussion around fees and compensation in both of those markets. I think it creates a healthy balance, but you will not see areas over-indexing to any one of those. I think it will always be a healthy balance of the two in order to make sure that the competitive advantages that we think we get from scale and dry powder do not go away.
You mentioned the eight products. Do you think that's kind of the right suite at this point, or is there a pipeline of newer products?
There's always going to be product development. I mean, back to outcomes, I think what we've tried to do is talk to the wealth investor with regard to outcomes, not product, meaning we're going to deliver you durable income. We're going to deliver you differentiated equity exposure. We're going to deliver you tax-advantaged real assets exposure with inflation protection and try to, again, get people out of this mindset of, "I'm buying a private credit product." It's, "What does it do for your portfolio?" Viewed through that lens, there's always going to be ways for us to innovate around providing solutions into the wealth channel.
Interestingly, though, with the eight that we have, two non-traded REITs, a large U.S. BDC, a diversified credit interval fund, a European BDC equivalent, a tax-advantaged infrastructure fund, sports media and entertainment fund, an investor now can kind of get the best of Ares across real assets and corporate exposures. I think there's going to be innovation in combining exposures. I think you might see geographic expansion, geographic-specific funds where people are trying to get access to one part of the franchise. As I sit here now with those core eight, any advisor or any investor can now access any part of the Ares organization in terms of what we do, which is a big milestone for us in terms of the development of the product.
Thanks. Before I get to my concluding questions, there's one from the audience that's fairly specific, but I think is interesting. Last year, during the Pluralsight issue, there was a wide dispersion in how the different lenders had that loan marked. You were at the right end of that spectrum. Why do you think there was so much difference there?
I don't know where the other people had it marked. I can't comment on that, but I'll give a couple of thoughts. One, again, back to the media and the private credit being the foil. They completely missed the narrative, right? The narrative was there's a default in a large private credit instrument. How much losses are going to flow through private credit, not what happened to the multi-billion dollar equity commitment that just went away, right? It was interesting just to watch how the media and investor community were digesting that event because it went right to the private credit and then didn't really talk about.
They never had the private equity.
Where was the private equity marked and how did that? I'll just put that aside because I think that's just a good example of this kind of coverage of the market. Private market valuation is a pretty specific process that we all go through to value. In healthy companies, it will tend to be pretty narrow in terms of the outcomes because you're looking at the rate of return relative to the traded markets. You're looking at M&A comps. You're looking at publicly traded comps. You're looking at DCFs, all the things that most of us were probably trained to do. You do, and you just don't get a lot of differentiation in return.
When you're going through a restructuring or a challenging credit, there's always going to be more subjectivity on what you think the expected outcome is going to be because you shift from pretty tried-and-true valuation framework to what's going to be the outcome of this restructuring and what's going to be the value of my future securities. I think you're always going to see a difference there because it enters a little bit more subjectivity. Why we got it right and others may not have just may speak to the fact that we probably have more experience in these situations than other people do and had a pretty clear view as to what the outcome was going to be. That's not, I think, given the amount of moving pieces and situations like that, you're going to see that happen from time to time.
Good. Maybe to conclude, talked about a lot of great things here today. You put out a five-year fee-related earnings growth CAGR of 16%-20%. How do you think you're tracking versus expectations there? Do you think that's too conservative? What do you think the biggest risk to reaching it is?
We haven't changed our guidance, so that's a pretty good indicator of how we're feeling about the business. If you look at our Q1 performance, we were growing in excess of the guidance, but that's neither here nor there, but it's just a fact. I always just try to answer it with, how remarkable is it that we actually could put out five years of guidance at that level of growth and specificity and deliver against it with a fairly tight tolerance, right? If you look at our history of a public company, when we put the guidance out, we've generally met or exceeded it. I only mention that because we're living in a world now where people are pulling guidance a quarter out, two quarters out, a year out, and we and others in our industry are standing firm on high conviction five-year guidance.
I think that should just be an indication of the durability of these businesses and that we can see forward because of the way that we raise and deploy capital with a high level of conviction into those numbers. Yeah, I do not see anything in the market that changes our level of confidence. Is it conservative? The guidance that we put out is lower than our historical experience, and I think people have noticed that, but the guidance is the guidance.
Yeah. That ties a nice bow around everything. Thanks a lot, Mike.
Thanks for having me.
Yeah. Thank you.
Good to see you.