Great. Well, good morning, everybody. We'll get started with our next session. I'd like to welcome Mike Arougheti, CEO of Ares Management, a leading global alternative asset manager with about $600 billion in assets under management and deep expertise in credit, real assets, secondaries, and private equity. Over the course of 2025, Ares sustained its industry-leading growth momentum, supported by a record pace of fundraising, accelerating deployment, and strong investment performance. The nice S&P 500 add just a day ago was a great way to wrap up the year.
Yeah, good way to start the week.
So, good way to start the week. Thank you for being here. Really appreciate your time.
That's good to hear. Thanks.
No shortage of topics to discuss, so we'll jump right in. Perhaps not surprisingly, I'd like to start with private credit. As we all know, the market has been a bit anxious about this for quite some time. It feels like investors are starting to move away from the issue a little bit, and I'm not sure whether it's just time away from some of the headlines or something else that's driving this, but what is your assessment of where we are in terms of private credit?
I don't know. I think they moved away from it because there was no there there, and I think the industry did a good job of putting out good fundamental information just to support the strength of the asset class and the quality of credit. There's something about private credit just in terms of the way that it's grown and the way that it's become investable that I think it's getting a lot more airtime than maybe it deserves, but as long as I've been doing this, which is 30 years now, there's been a view that has not proved out that there's risk in private credit that somehow we need to be worried about.
If you look at the Ares credit portfolios, they are large, highly diversified, deleveraging, our non-accrual rates are near historic lows, our company-level cash flow is growing 10%-12% consistently per annum, interest coverage is now well over two times and improving as rates are coming down. If you look at bank charge-offs, they're at 60 basis points and flat to down. If you look at credit card delinquencies and the strength of the consumer, flat to down. So there's just no evidence to support it. And I think that's probably why it's moved on. In terms of the strength of the market, we talked about our pipelines in October at or near record levels. That's now pushing through. Deployment in Q4 is strong, and I expect to see it continue.
Great. One of the interesting recent developments, and maybe coincidental with all the kind of headlines, has been the Bank of England looking to do, I guess, a stress test in private markets. It feels like private credit in particular, you and many other large alternative asset managers are volunteering into that, which, frankly, from my perspective, I think is actually really helpful. But how do you think that's likely to play out? What do you think we're going to learn? And what are the chances we'll see something similar in the U.S.?
It's interesting. I think what you're going to learn is that private credit has become a very important component of the capital markets. It's interesting. If you look at the leveraged finance markets over the last 10 years, and include C&I loans at banks, loans, bonds, and private credit, it's been roughly flat, in and around 20%-23%. And private credit has taken share from the other in-trans parts of the market. So there's no indication that credit is being extended to non-creditworthy borrowers or assets, but there are structural shifts happening in the market.
So I think as we do some of these stress tests and the research comes out, I think what you're going to find is that private credit, because of the low leverage in the asset itself and the way that it's structured relative to banks, insurance companies, and the securitization market, it's actually had a stabilizing effect on both the markets and the middle market economy. So we're all for the work that's getting done. I think it's going to be a real positive for the industry. And I think transparency is always a good thing.
Great. All right. Let's talk a little bit about the fundraising dynamics. You guys are on track for, I believe, a record year, over $90 billion. And that's without your largest direct lending strategies in the market this year. A couple of questions there, I guess. One, how, if at all, are all these headlines impacting institutional LP appetite for all things private credit, not just direct lending, but more broadly? And then maybe talk to us a little bit how you're expecting 2026 to shape up in terms of fundraising.
Yeah, we've had a great year. It's been broad and diversified, so it's been institutional and wealth. Our SMA and open-ended fund business continues to grow. CLOs have actually opened back up at certain times this year, so it's been a nice, diversified, broad-based fundraising year, and as you pointed out, over 30 funds in the market without a lot of our large-cap private credit funds. I think we did about $105 billion trailing 12 months last quarter, and so that's a pretty good pace against our record year of $93 billion. We're going to end the year really strong here. Going into 2026, we're not seeing any slowdown in demand from the institutional community for private credit. It's been consistent, if not accelerating.
And in the wealth channel, I think there was some anxiety back to your earlier question that we were going to see a slowdown in flows. We haven't really seen material slowdown in flows. Our peers haven't either. So I think that the markets are powering through. 2026 should shape up to be another strong year off of the base that we set in 2025. We will begin to see some of our larger flagship private credit funds come into the market. Our ABF funds will be coming back. And on the back end of the year, I'd expect that some of our larger U.S. loan funds will be coming back into the market. So I think we'll continue to accelerate.
Yeah. Let's talk about ABF, which is actually my next question, but really broaden this out to alternative credit platform, the way you guys sort of frame it. Spend a little bit just discussing the opportunities for Ares in this part of the market, both on IG private credit as well as non-rated ABF strategies. I think most of your peers focus more on the IG piece. Why non-rated? Why is it interesting? Who's looking at this? What is the LP base kind of shaping out to be there?
Yeah, it's nice to follow Mark because I think it gives a pretty good view of how the market is structured and growing. We've been in the ABF business before people were talking about it. We launched that business in earnest at the end of 2005 and have always been focused on what we would call the alpha generative part of the market. For those who have been following, we've raised three of the four largest ABF funds, and my expectation is, as we launch our next vintage, that'll have us having raised and managed for the five largest ABF funds. The reason we focus on the bottom end of the market, and then I'll come to the non-rated piece, and then I'll come back to the IG, is I think it's just highly differentiated in terms of the outcomes that we can deliver to our investors.
It is much less rate-oriented, and it's more credit-oriented, which I think is what Ares is best known for and what the investors seek us out for. And it's actually just infinitely more profitable. So if you were to look at how we get paid on non-rated portfolios relative to rated, it's about an eight to one multiplier. So it's great to throw around hundreds of billions of dollars of IG as headline AUM, but you have to raise eight times as much in that market to generate the same revenue dollars. And so we've tried to stay balanced. About 50% of our ABF business is, in fact, rated IG, and the other 50% is non-rated. I think the two have to work together. You do get some sourcing benefit by having the rated piece.
There are certain times in the market where you'd rather be a lender to a portfolio, which will move you up the capital stack. And there are certain times in the market where you want to move down and own the asset. And so part of the relative value skill set that we have is knowing where we are in the market, in different asset classes and market segments to make that decision. So I don't think you want to be exclusively one or the other. We've just found where we think it's a much differentiated proposition for the investors to be on the non-rated side.
Interesting. Let's talk a little bit about deployment. You mentioned in your earlier comment that Q4 is off to a good start. You guys see an increased amount of activity. I think broadly, Ares is sitting just on an enormous amount of dry powder in private credit, and when people think about deployment, I think for the most part, folks talk about M&A-related deployment and kind of more the direct lending part of the business, so talk to us a little bit of what you're seeing in both sort of the more "traditional" direct lending deployment outlook as sponsors sort of come back to market, but also what opportunities in the non-direct lending space are you seeing in the market today?
Yeah. Look, the traditional direct lending business is a very large, mature market. And so people appropriately focus on it. But I'm glad you asked because when we talk about private credit, we have to remind people it's not just corporate direct lending. It's asset-backed and asset-based finance. It's infrastructure lending. It's real estate credit and all things in between: opportunistic, structured loans and bonds. In terms of deployment, Q3 was a fantastic quarter of deployment. We put out a little over $40 billion in the quarter. We had talked about momentum coming into Q4, just given the rate backdrop, the economic environment, the energy around less regulation, and that's playing through. So as I mentioned earlier, I would expect Q4 deployment to be quite strong. And my sense is that that will roll into the earlier part of the year as well.
And it's also very broad-based, which is also a good indicator of the health of the markets. We don't have one segment that is disproportionately driving the deployment. So we're seeing really strong opportunities in the ABF part of the business. Opportunistic credit continues to deploy well, taking advantage of some of the illiquidity that exists in the equity market right now and the need for DPI. Our infrastructure credit business is very, very busy, just given the strong growth in demand drivers in digital infra, real estate credit. Real estate's having an inflection right now, and we're seeing strong demand there. So it's been very broad-based.
That's great. Let's shift gears. I'm hoping to spend the next couple of minutes on the wealth channel. It's been, obviously, a very important source of growth for you as well as for many of your peers for the industry broadly. A couple of months ago, you guys had new target there, $125 billion in wealth-related AUM by 2028. I think previously it was about 100. And you have real kind of tangible evidence to support that flow. So it's been really good, kind of running at about $4 billion quarterly inflow pace. Talk to us a little bit about how you expect that to evolve over the next 12-18 months. How are you thinking about sort of the product evolution within your wealth offering? So any color on that would be helpful.
Yeah. The momentum in wealth, it's very strong. It's a combination of just demand coming from the advisor and investor community. It's coming from the maturation of the market, and it's coming from the significant investments that we've made in product innovation, distribution, servicing, and advisor education. We have eight semi-liquid products that we sell through the wealth channel. Each of them is scaled and diversifying its distribution. We think it offers the best of Ares' institutional quality access to real assets, credit, and equity. And the momentum, as you highlighted, is consistent, and we're seeing good linear growth as we're broadening out our distribution partners around the globe. I think the product set will continue to grow. We see demand in other pockets of the globe for geography-specific funds.
We've opened up two new funds recently, one in core infrastructure and the other in sports, media, and entertainment, that are having some very, very good initial flows, so we'll be rounding out the product set, but I think those core eight, as you highlighted, are already setting us up to hit that guidance just by broadening out our partner relationships in the channel.
Great. I do want to zone in on direct lending part of that offering, partially because it's just been such a big driver for industry flows. It was a really easy product, I think, for advisors in the market to generally understand. It offered, obviously, really good returns. Part of that is coming down just because rates are coming down and spreads are really tight. And then you kind of have the recent headlines. How do you think that's impacting financial advisor demand for non-traded BDCs in particular? And more importantly, when it comes to Ares' products, both the U.S. version, ASIF, and the European version, how are they differentiated maybe relative to some of the others in the space?
There's a couple of questions in there, so I think you have to appreciate the advisor is not just focused on private credit. It's a much more sophisticated portfolio construction, which is why what we try to do is say, think about durable yield that can come from traditional private credit. It can come from infra. It can come from real estate, but I think they're focusing predominantly on durable income and yield because a lot of this is for retirement consumption. They're thinking about differentiated equity exposure where they can access large parts of the global economy in private markets and get exposures that they can't get in the public markets, and they're looking for various tax-advantaged access points to parts of the real asset market and things like our 1031 exchange product or our core infrastructure product.
So it's a much more sophisticated portfolio construction than I think maybe people appreciate. Private credit is obviously a meaningful component because it has proven to be a very durable generator of income for people, but it's not the only thing that people consume. And we have seen flows shift. So if you go three years ago, you had more growth in real estate than you had in private credit. Real estate flow slowed. Private credit increased. If private credit stabilizes, you may see real assets. So I don't expect that when you look at the market generally that we're going to see a slowdown in flows, but you may see a different mix. I think the advisor community, similar to the institutional community, doesn't think about private credit as an absolute yield product. They always buy it as an incremental return to whatever the liquid alternative is.
So ironically, and we've seen this in the institutional business over 25 years, when rates are coming down or rates are going up, the demand for private credit is not necessarily impacted. The demand for private credit is driven by the fact that we've demonstrated that we can generate 150 to 300 basis points of excess return. And if you think about it from the advisor perspective, owned in a semi-liquid form, compounding over 10, 20 years for their clients, that is a meaningful driver of wealth creation. And so the key for us is we have to stay laser-focused on delivering the excess return, and that's what drives the demand. And as I sit here today, we're still doing that, and I'm confident that we will, so.
Yeah. That makes sense. One of the key features of your guys' growth has been actually outside the U.S. I think about 40% of your wealth products are coming from outside. Can you frame maybe some of the key difference between U.S. and non-U.S. distribution landscape for alt products? It feels like both markets are fairly immature, but maybe Europe is even, or non-U.S. is even further behind that. But how do you think the competitive set kind of evolve and differentiate between the two markets?
Yeah. You asked me that on your prior question. I didn't get to it, but we are differentiated in the product because of the geographic access points that we give through things like ASIF, which is our European direct lending product. And we're differentiated in the breadth of the distribution. So about 40%, as you said, of our distribution is coming from Europe and Asia-Pacific, which is quite unique in this market. That's a reflection of the investments we've made in sales and servicing in those markets and the relationships that we have there. And it's also just a reflection of the fact that we have leading credit franchises in the European and Asia-Pacific markets that has kind of given us a leg up on scale and brand that I think our peers don't have. The market structure is quite different.
In the U.S., it's dominated by the large wirehouse platforms. So 65% or so of flows are still flowing through the large wirehouse platforms. That benefits folks like us who have deep platform-wide relationships with the big platforms at the front office as well as in the field and platform-wide. So not surprisingly, when you look at the structure of the market in the U.S., the large alts platforms who have those relationships, who have the institutional brand, are the ones who are getting the shelf space. So I think the winners have largely been determined in the U.S. wealth channel for alts. In the European and Asia-Pacific market, much more fragmented, much less dominated by the wires, deeper participation by private banks and asset management platforms. The direct financial advisory community is more entrenched there too.
So you have to go about selling and servicing product in those markets in a fundamentally different way than you do here in the States. So I don't know if I would call that less mature or less evolved, but it's definitely less concentrated.
Yeah. Probably more resources required as well to.
Yeah, harder to get at, but back to our market position, I think it's a competitive advantage if you're able to bring product and service it well in those markets. It's hard to do.
Just staying on the theme for one more minute, one of the trends and themes we've seen in the space for the last 12 to 18 months are really collaboration with traditional managers and really kind of runs the gamut. Some people will form JVs. Some people will do other things. Some people will buy capabilities, obviously, outright. We haven't really seen you guys do a lot on that front, if any, of any material size that is out there. How are you thinking about what's holding you back and tie that to the 401(k) opportunity because it does feel like the targeted linkage is important when folks are thinking about that market?
I don't know that there's anything holding us back. And you've watched us grow the business over many, many years. I think we tend to be a little bit more measured in our enthusiasm for some of these large TAMs, 401(k) being one of them, and I'll come back to that. But when I think about partnerships between traditional managers and alternative managers, I try to think of it through the customer lens and the advisor lens and say, "Am I getting a differentiated exposure at a differentiated price or access point than I could get otherwise?" And you have to have a view that your business is either distribution-led or product-led. And I think those that are going heavy into partnerships with traditional asset managers believe that there's a creative distribution and that the end client wants to buy traditional product merged with alternative product.
My current view, and the reason you haven't seen us entering into these partnerships, although we've had lots of conversations and if the world goes that way, I think we'll be able to participate in that growth, is I envision a world where there's open architecture in model portfolios, and it's our job to deliver access points for people to buy alts alongside traditional assets. So today, if somebody wants to buy a T. Rowe bond fund and they want to marry it with a private credit exposure from Ares, they can do that in any number of ways. And they could buy it in non-traded form. They could buy it in traded form. They could buy it in institutional closed-end form. So that choice already exists. So I just haven't convinced myself that you're delivering a better investment outcome to the client.
And I think ultimately, and this will segue to 401(k), the retailization of alts for me is all about access and outcomes. And so you want to broaden access, but you have to do it by delivering differentiated outcome. And I just don't know that when you put it all together, that it's delivering a better experience for the client. And 401(k) obviously has a lot of momentum. I am a huge supporter of putting alternative assets in defined contribution plans. What I remind regulators and legislators about when they're talking about it is most Americans already have access to alternatives through their defined benefit plans. So if you look at who some of our largest clients are, they're the largest state and corporate DB plans in the country.
And so the idea that as the market structurally shifts from defined benefit to defined contribution, we're somehow going to take the access to these excess returns away from the individual investor doesn't make sense. But when you start to allow the retail investors to make those investment decisions themselves, it raises questions about investor suitability, fiduciary duty of the advisor and the plan sponsor, and all of those things will have to be sorted out, discussed, and codified before the channel meaningfully opens up to alternatives. When it does, it's not as though a switch is going to flip and all of a sudden all of the entrenched demand for alts that exists in the institutional market and the non-traded individual market all of a sudden shifts to DC.
And I think you'll see an evolution of that market where younger investors may take more risk in certain parts of the alts landscape than maybe their parents had. But again, it's exciting because it's innovating in the capital markets. It's opening up new access points. But I also like to remind people if Ares raises a dollar in the 401(k) market, I still have to go source really high-quality excess return for the investor. And the binding constraint on growth for us, which is why we've been so focused on building capability, is sourcing good assets. And whether the dollar to support that asset is coming from 401(k) or the non-traded market is not really that newsworthy. The growth is going to be driven by differentiated sourcing and portfolio management and then diversifying the distribution to support that growth.
So I'm excited about it because it's another channel for growth, and it's diversifying, but it doesn't necessarily transform the business for us in the sense of opening up a new cost of capital or a new capability set that we don't have.
Yeah, and I guess it sounds like you could approach it in a more open architecture form as well.
I would think that that's the way that this is, my view. If you think about how people are managing their 401(k)s today, that is how people are trained to be in that market, is you have a menu of alternatives, open architecture by manager, by risk return, and you buy it that way, and so in that world, the key again is going to be to create the right product wrappers and access points for people to access, not necessarily to have a deep exclusive partnership with a traditional market.
Okay. Let's talk about a couple of other interesting businesses you guys have underneath. GCP, the acquisition closed a little while ago. You're deep into integration. Talk to us, I guess, a little bit about how that's coming along, both relative to your original expectations on revenues and expenses, and what do you expect out of that business in the coming years?
Integration's going great. We talked about this on the earnings call. It is on plan from a timing and pacing perspective. It's been a little bit of a drag on margins this year as we're running some duplicative infrastructure in Europe, Asia, and our U.S. industrials business. That will start to roll off as 2026 progresses, and so I think we'll see good margin expansion start to come into play as we get through 2026. I would say on the revenue side, probably better than we thought in the sense that the data center capability that we bought is accelerating in terms of the size of the pipeline and the investor demand for fundraising that we've been able to generate off of that pipeline, so very early post-acquisition, we're able to raise a meaningful $2.5 billion fund to support our Japanese data center business.
We're now, as we talked about, monetizing the pipeline that's in excess of $6 billion and growing. So I'd say probably a little bit more upside on the digital infra side of the business. And it's been great. I think it's really cemented our position as a real global leader in real assets, both real estate and digital infra. So post the acquisition, we're now the third largest institutional manager of real estate. I think we're the third largest owner of industrial warehouses in the world. And so that's coming with a lot of brand value, information, edge, and data that we can then put back into the platform and monetize. So yeah, it's been great.
Another big business for you guys that's facing some interesting secular developments is secondaries, and for the most part, that's still been a largely private equity-centered asset class. You guys had quite a bit of success here expanding into infra, so the infra secondaries business, over $3 billion fund with, I think, another $2 billion sort of related vehicles, so quite a lot of growth there. How do you expect the secondaries marketplace to evolve and really the role you guys play in that part of the world over the next couple of years?
Yeah, this was one that we had real high conviction on five, six years ago when we made the landmark acquisitions really go after what we saw as some transformational change happening in secondaries. Maybe oversimplifying the business, the way to think about the secondary market opportunity is to look at the growth in the primary market. That's our TAM, and so as you begin to see deeper penetration of real assets and private credit in the primary market, not surprisingly, you'll begin to see the evolution of secondary solutions in the non-PE side of the alts market, so we saw that happening, and we didn't see a lot of competitive product or capability that was going after those markets.
You had a meaningful transformation also occurring, which was a shift from just LP-led transactions, i.e., large global limited partners that were looking for liquidity or some kind of a solution for portfolios of LP interests, shifting to what the market is calling GP-led, meaning liquidity solutions to the general partner to help them navigate some illiquidity at their management company, bridge from fund to fund, etc., etc., and so that whole world has gone from 0% of the market to 40%-50% of the volumes this year and will continue to grow at pace, because of the growth of the primary market, both of those markets will now be growing. I think 2024 market did about $175 billion. That is growing 15%-20% per year, so you're going to see that market double likely over the next four or five years. It is a capital-constrained market.
So for all of that growth, you probably have one year's worth of deployment that's actually sitting in dry powder, which is pretty unique. So there's a little bit of catch-up happening now in secondaries fundraising in order to get after the deployment opportunity. And I think what was so attractive about that acquisition when we made it, we articulated three ways that we were going to add value. One, we were going to open up new markets, infra, and credit. And we've done exactly that. So we've almost from a standstill now created campaign funds and credit and infra that are approaching $5 billion. We said that we were going to open up the non-traded channel using secondaries as a way to give differentiated private equity exposure to our clients. And we've done that through our PMF product, which is now a multi-billion dollar and growing product.
And then we said we were going to make a meaningful shift into the GP-led part of the business because Ares actually has by far the largest calling effort in real estate, infrastructure, and credit on the global GP community. And so all of those hundreds and hundreds of people around the world that were calling on GPs with loan product are now calling on them with loan product and GP solutions in the form of minority stakes, NAV loans, various fund finance solutions, GP prefs. So we were able to take that 30-year track record and technology and turbocharge the revenue synergies on deployment. So it's been a big success.
Yeah. And it sounds like a lot of runway there as well. All right. Let's shift gears, talk about a couple of maybe financial questions as well. You alluded to a really strong fundraising outlook for 2026 already. So obviously that bodes well for revenues and taken together with your deployment comments. Maybe talk to us a little bit about margins and profitability? To your point earlier, this has been a slower year for FRE margins for the firm for reasons we've discussed. As you look forward, it sounds like momentum at FRE margin is really ramping into 2026. But talk to us a little bit about what kind of incremental investments you made in the business that sort of supports this faster outlook for FRE margin? And where do you see that ultimately going over the next couple of years?
Yeah. Our guidance, just to remind people, has been that we would expect, depending on where we are in our growth trajectory, - 150 basis points of FRE margin expansion per year. This year, we're going to be at the lower end by design because we're absorbing all the incremental cost and development expense to launch the digital infra business on the backs of GCP. My expectation is heading into 2026, because of the fundraising success we've had and the impact of deployment on contribution margin, that you'll see margin expansion in 2026 at the higher end of the range. So you'll begin to see the benefits of the investments that we've made come through the P&L in 2026. We've also been very consistent for as long as we've been in business. We are more focused on long-term durable growth with margin expansion, not maximizing our FRE margin.
And so even when we have businesses that are generating excess margin, there is a very meaningful strategic conversation around the table about how do we reinvest some of that margin in durable growth. So the reason we're at 0-150 is we could probably run higher, but we would do it to the detriment of long-term durable growth. And so we try to get our business leaders focused on understanding that we want margin expansion, but we also want investment in growth engines. And so the places where we've been investing, not surprisingly, are where there are big addressable investment opportunities that we feel are undercapitalized: digital infra, real estate credit, infra credit, asset-backed finance. So that's both a team build. It's a geographic expansion. And then you obviously have to put systems in place to scale those businesses as they grow.
We're doing all of those things.
Yeah. Makes sense. Ares is a stock. It gives you kind of two things. Obviously, the growth has been good, but you guys are also paying a very healthy dividend, and a robust capital return framework has always been kind of part of the pitch to the investor base. Over the next couple of years, the performance-related contribution to the business is set to scale pretty meaningfully, and you could see it. It's quite visible given the European waterfall style structure for your credit funds. It gives you a lot more free cash flow. How are you guys thinking about redeploying that free cash flow, whether it's higher, faster dividend growth? Is there opportunity for deleveraging, buybacks, more money? Talk to us a little bit about that.
E, all of the above. Yeah. We'll know when we're in that market and we see what the pace is. I think the good news is we have a lot of experience in organic growth, and not with most, if not all, of the acquisitions we've made have been underwritten with a lot of financial and strategic accretion that's played through the business. I think we've done a really good job on organic growth initiatives and opening up new markets and building new teams and innovating around product. We have good experience using the balance sheet for strategic growth initiatives, so I think the answer is going to be all of the above. As a management team, we're thinking about directing that capital to its highest and best use and its highest return. If that highest return is a buyback, we would do it.
But my gut tells me that when we get into that phase of our capital management, it's going to be more about redeploying that capital to, again, create more durable growth engines around the world.
Great. Okay. Well, we are at time, so we'll leave it there. Thank you.
Thank you so much. Great to see you.
Thank you, too. Thanks for having me.
Nice to be here.
Yep. Thank you.