Welcome to Ares Management Corporation's first quarter earnings conference call. At this time, all participants are in a listen only mode. As a reminder, this call is being recorded on Friday, April 28, 2023. I will now turn the call over toCarl Drake, Head of Public Markets Investor Relations for Ares Management. Please go ahead, sir.
Good morning. Thank you for joining us today for our first quarter conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer, and Jarrod Phillips, our Chief Financial Officer. We also have a number of executives with us today who will be available during the Q&A session. Before we begin, I wanna remind you that comments made during this call contain forward-looking statements and are subject to risks and uncertainties, including those identified in our risk factors in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results, and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Ares fund.
During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our first quarter earnings presentation available on the investor resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures. Note, we plan to file our Form 10-Q early next month. This morning, we announced we declared our second quarter common dividend of $0.77 per share on the company's Class A and non-voting common stock, representing an increase of 26% over dividend for the same quarter a year ago. The dividend will be paid on June 30th, 2023, to holders of record on June 16th. I'll turn the call over to Michael Arougheti, who will start with some quarterly financial and business highlights.
Thanks, Carl. Good morning, everyone. I hope everybody's doing well. Following a volatile 2022 in the equity and debt markets, transaction activity in the first quarter got off to a slow start and was uneven across various markets that we participate in. We began to see some signs of thawing as the quarter progressed, but the dislocation in the banking sector late in the quarter created considerable uncertainty about the banking system, the economy, and ultimately, the path of interest rates. Fortunately for Ares, our asset-light business model tends to insulate us from balance sheet-driven volatility, and our long-term investment capital enables us to be opportunistic when other market participants retrench. For the first quarter, our business metrics continued to show strong year-over-year growth, and we're on track for a more significant fundraising year with seven of our largest commingled funds expected in the market this year.
In the first quarter, we raised $16 billion in new fund commitments and ended the quarter with $360 billion of AUM. We also generated strong year-over-year growth of 25% in management fees and 24% in Fee Related Earnings while delivering a strong quarter of fund performance for our investors. Our first quarter realization activity was seasonally light, but our net accrued performance receivable continues to build, and we remain on track with our original European waterfall net realized performance income guidance for this year and next year, as Jarrod will discuss later. We continue to see robust investor demand for our alternative private capital offerings. In the market, we're observing a flight to larger, higher quality managers as investors are consolidating their allocations with preferred managers.
Many of our largest funds with first closes are seeing significant commitments that represent half or more of the targeted fund size. The pipelines of investors working toward closing is encouraging. We also benefit from having a high re-up and crossover rate from existing investors. For the first quarter, over 90% of our $14 billion in direct capital raised was from existing Ares investors. As we outlined last quarter, we're actively raising our sixth European Direct Lending Fund and our second Alternative Credit Fund. For our sixth European Direct Lending Fund, we've seen robust demand from investors and have accepted to date and anticipate through early Q2 subscriptions that will bring the total first close to more than $8.5 billion of LP commitments. This amount includes subscriptions of $4.7 billion accepted through the end of the first quarter.
We continue to see strong fundraising momentum for this fund and anticipate that at final close, the fund will exceed the predecessor fund, which had EUR 11 billion of LP commitments and EUR 15 billion in total capital, including fund leverage. Our second alternative credit fund is also seeing significant demand. As a reminder, our alternative credit strategy deploys flexible capital focused on large, diversified portfolios of assets that generate contractual cash flows. We've accepted subscriptions to date and anticipate through May a total first close of approximately $3.5 billion. This includes $1.8 billion of commitments closed through the end of the first quarter. With the robust demand for this fund, we expect commitments to this fund to easily exceed that of its predecessor, which totaled $3.7 billion, and we're targeting a final close later this year.
This fund, like its predecessor fund, carries a unique charitable endeavor tied to our performance fees, where 10% of the carried interest for closed-end funds and 5% of the incentive fee for the open-end fund will be donated to support global health and education initiatives. These contributions are split equally between our investment team and Ares. Inclusive of the fund's first closing, the alternative credit platform will have over $10.5 billion of capital designated with this charitable tie-in. Based upon performance to date, our predecessor alternative credit funds have already reached approximately $10 million for potential charitable donations. In our secondaries business, we entered into a credit secondaries joint venture with a large strategic investor with initial capital of approximately $1 billion.
We believe that this well positions us to be a market leader in the growing credit secondary sector, particularly due to our leading private credit franchise, knowledge, insights, and relationships with middle market companies and sponsors. We intend to further scale our presence in this new strategy with the recent launch of our first credit secondaries commingled fund with a first close expected later this year. This is another great example of the types of product extensions and growth that we can bring to acquired platforms shortly after acquisition. With respect to our other fundraisers, we're on track to hold a sizable first closing for our third US senior direct lending fund either late Q2 or early Q3. As a reminder, our second fund had $8 billion in LP commitments and approximately $14 billion in total capital, including fund leverage.
We also anticipate first closes for our second climate infrastructure fund, our third infrastructure secondaries fund, and our seventh corporate private equity fund over the next several quarters. Later this year, we expect to launch our third US junior capital direct lending fund with the first closing expected early next year. Overall, we expect to have nearly 30 different commingled and perpetual capital fund offerings in the market this year in addition to our managed accounts and CLOs. Last week, we priced the IPO of our second SPAC, Ares Acquisition Corp II. We saw significant demand for the offering with the $400 million base deal upsized to $450 million. The underwriters partially exercised their over-allotment option to get to a final close of $500 million.
At the end of the closing, AAC was the second largest U.S. IPO this year and the largest SPAC IPO since January of 2022. We believe that this is a strong validation of our differentiated platform and approach to this asset class. With our strong initial investor demand and robust fundraising pipeline, we're already seeing a rebuilding of our shadow AUM, which increased from $42 billion at year-end to over $50 billion at quarter end. With our positive outlook for continued fundraising strength in the coming quarters, we expect to see further increases in our available capital, enabling us to be more opportunistic with our deployment in what we believe is an attractive investment environment. In the wealth management channel, we're excited to announce that we've recently launched our non-traded BDC, Ares Strategic Income Fund, or ASIF.
We also remain on track to continue adding distribution partners for our U.S. products. We're expanding our retail distribution and products globally, including planned dedicated vehicles targeting the European and Asian regions later this year to take advantage of our credit expertise. While we, like others, continue to experience slower flows into our two non-traded REITs, unlike others, our net inflows remain positive in the first quarter, with a combined approximately $350 million of gross quarterly proceeds, inclusive of our 1031 exchange program, versus approximately $200 million of quarterly redemption requests. We believe that success in the retail market will ultimately gravitate to a handful of all players that have attractive products across all the private asset classes, a global presence and large distribution and service teams who can provide education and thought leadership to financial advisors and their clients.
With our continued expansion in products and distribution and the launch of our retail education portal, Access Ares, in June, we believe that we're cementing Ares as one of the leaders in the alternative retail market. From a deployment perspective, the first quarter was, as expected, slower across many of our strategies due to typical seasonal factors and decreased market activity. That said, the $12.9 billion of gross deployment in the quarter was in line with our internal expectations at the beginning of the year, and we remain on track with our growth objectives for fee-paying AUM for the year. We believe that our private credit strategies are taking market share in a smaller pool of transaction opportunities, and we expect that this will pay dividends as more issuers and sponsors experience the benefit and reliability of our flexible capital solutions.
Our pipelines are building in our more opportunistic strategies that often see higher deployment in dislocated markets. In alternative credit, the investment pipeline is very strong as our team is seeing numerous opportunities out of the regional banks, including asset portfolio sales and regulatory capital trades, in addition to their normal pipeline of asset-backed transactions. In our private equity group, our special opportunities team is seeing a significant pickup in their pipeline as banks and other traditional providers retreat from the market. We're seeing a growing number of opportunities from companies that need solutions as they struggle to amend and extend their capital structures.
In real estate, we're starting to see compelling opportunities from fund complexes that need liquidity to meet redemption requests. The most interesting opportunities currently in the pipeline are in the debt markets, where we can step into the funding gap for refinancing opportunities and provide fresh capital on a structured basis. In direct lending, we're beginning to see more deal activity and some larger transaction opportunities, which should set us up for an increase in deployment in the second quarter. The expected investment returns for this vintage of private credit are attractive, with meaningfully improved terms, more conservative capital structures, higher base rates, and significant excess credit spreads. In our secondaries business, we're seeing a growing number of both LP and GP-led opportunities as certain LPs seek liquidity and certain fund sponsors look to accelerate liquidity into legacy fund vehicles.
Overall, we have many strategies that can take advantage of constrained liquidity in the market. With $88.6 billion of available capital and additional closes for several of our large commingled products in the coming months, we expect to have a strong capital base to take advantage of the market opportunities for our clients. This is also a very attractive environment for our affiliated insurance platform to be building its annuity origination business. We now have over $7.5 billion of AUM at Aspida, and over 95% of the portfolio is protected from surrender charges and without the issues associated with a large legacy book. Going forward, we expect to continue to raise third-party capital to further scale our affiliated insurance platform.
We believe the strong secular growth that we continue to experience across our business is ultimately a result of our strong and consistent fund performance. Our funds portfolios are generally continuing to see cash flow growth with positive fundamentals. Despite higher interest rates flowing through to our portfolio companies, we continue to see solid cash flow growth, low defaults, and resilience in our credit metrics. For example, our US and European direct lending portfolios continue to see mid to high single digit year-over-year EBITDA growth. In direct lending, our loan-to-value statistics remain steady between 43% and 50% for the US and Europe. At Ares Capital Corporation, which is a good proxy for our US direct lending business, non-accruals totaled 2.3% of the portfolio at cost and 1.3% at fair value, which continue to be below our 15-year historical averages.
These credit metrics remain at benign levels despite the significant increase in base rates. As a result, our direct lending funds have experienced a significant increase in coupons with a de minimis offset from credit-related issues. Our global real estate portfolio continues to see strong but moderating rental growth and high occupancy rates. Our highest conviction sectors of industrial and multifamily account for more than 75% of the portfolio's gross assets, with another 12% invested in our favorite alternative sectors, including self-storage, triple net lease, and single family rental. In industrial, on a same-store comparable basis, we saw rent growth of approximately 70% over the last 12 months and more than 90% tenant retention across our industrial portfolio. In multifamily, our same-store re-leasing spreads continued to see 10% or better annual growth over the last 12 months.
From an allocation standpoint, we continue to be meaningfully underweight to office, retail, and hospitality assets. Our US office equity exposure is only 2% of our global real estate portfolio. Lastly, in our private equity group, our corporate PE portfolio continues to perform well as year-over-year EBITDA increased 10%, including growth supported by accretive acquisitions and synergies. Now I'd like to turn the call over to Jarrod for comments on our financials and additional details on the performance of our funds. Jarrod?
Thanks, Mike. Hello, everyone, and thank you for joining us today. As Mike stated, we once again experienced strong growth in our financial metrics, including management fees, fee related earnings, realized income, AUM, and FPAUM compared to the first quarter of 2022. Our management fee centric and FRE rich business model continued to deliver strong results despite the significant market volatility in the first quarter stemming from rising interest rates, continued geopolitical uncertainty, and the challenges in the banking sector. In addition, the sizable amount of capital that we've raised year to date has strengthened our available capital position and sets us up for greater deployment-driven growth in our FRE and margin expansion during the second half of this year.
Starting with revenues, our management fees totaled over $600 million in the quarter, an increase of 25% compared to the same period last year, primarily driven by deployment of our available capital. Other fee income of approximately $20 million was largely in line with the first quarter of 2022. FRE totaled $255 million, an increase of 24% from the first quarter of 2022, driven by higher management fees from deployment over the last 12 months. In a market environment that continues to be characterized by volatility and lower transaction volume, our ability to grow through management fees and FRE is a significant differentiator for Ares.
Our FRE margin for the first quarter totaled 40.6%, roughly a 70 basis point improvement from the 39.9% in the fourth quarter, but in line with the 40.6% margin from the fourth quarter, excluding the large impact from FRPR. As we stated on last quarter's call, we expect to see margin growth resume in the second half of 2023, with a larger step-up in 2024 and 2025 as we absorb the impact of our historical hiring and deploy the significant capital that we've raised, and will continue to raise over the next several quarters. As such, we continue to be on track to achieve our goal of a 45% run rate FRE margin by year-end 2025.
Our realization activity was limited in the first quarter, with net realized performance income of over $7 million as equity market volatility and significantly lower transaction volume reduced monetization opportunities. We are optimistic that once the market has clarity around peak Fed funds rate and the direction of the economy, we could see an increased monetization opportunity. Despite limited European waterfall realized income in the first quarter, we continue to remain on track for the $100 million we expect in 2023, which is largely derived from credit and credit-like funds. For 2023, we currently have visibility on at least $20 million of European waterfall net realized performance income in Q two, with the remainder likely coming from tax distribution related payments from our funds in the fourth quarter.
Generally, we expect 60%-80% of these types of distributions to be recorded in the fourth quarter, and then most of the remaining distribution to occur in the second quarter once tax payments are finalized. We do expect less seasonality in our European waterfall realizations to start in 2024 and beyond, as we reach the harvest stages of the fund lives for certain funds. Realized income in the first quarter totaled $254 million, up 15% from the year-ago period. After-tax realized income per share of Class A common stock was $0.71, 9% higher than the level of the first quarter of 2022. As of March 31st, our AUM totaled $360 billion, compared to $325 billion a year ago.
Our fee paying AUM totaled $234 billion at quarter end, an increase of 18% from the prior year. Our year-over-year growth in fee paying AUM was primarily driven by meaningful deployment across our U.S. and EU direct lending, special opportunities, and alternative credit strategies, which all pay management fees on invested capital. As Mike mentioned, our expectations assumed a slower deployment environment in the first quarter. Our actual results were in line with our expectations for fundraising deployment and quarter ending AUM and fee paying AUM. As Mike highlighted, we're rebuilding our shadow AUM, which sets the stage for higher deployment and future management fee growth. Our AUM not yet paying fees available for future deployment totaled $51 billion at quarter end, which represents over $480 million of incremental potential future management fees.
Our incentive eligible AUM increased by 10% from the first quarter of 2022 to $211 billion. Of this amount, $67 billion was uninvested at year-end. In the first quarter, our net accrued performance income rose to $882 million, an increase of $50 million from the previous quarter. Of this $882 million of net accrued performance income at year-end, $614 million, or nearly 70% was in European waterfall funds, of which $351 million is from funds that are past their reinvestment period. Regarding fund performance, despite an extended period of market volatility, our strategies generally continue to perform well relative to their benchmarks.
While the full performance details are in our earnings presentation, we wanted to highlight some of our larger fund strategies. In credit, all our key composite strategies across US and European direct lending and alternative credit delivered positive gross performance for the first quarter, ranging from 1%-4%, with 4%-11% returns for the last 12 months. In private equity, both of our core investment strategies have meaningfully outperformed the public equity and high yield markets over the past year. These strategies are designed to take advantage of the volatility in the markets. Our special opportunities composite generated a gross return of 3.2% in the first quarter and 10% over the last 12 months. Our corporate private equity composite was down a modest 70 basis points in the quarter, but up more than 4% for the last 12 months.
Within real estate, our U.S. real estate equity composite gross return modestly declined 70 basis points for the quarter, but was up slightly over the last 12 months as cash flow growth was largely offset by increases in cap rates. Lastly, as we announced last quarter, we closed the purchase of the remaining 20% of Ares SSG's management business that we didn't already own. Our business across the region now has nearly 60 people in 8 offices, managing approximately $12 billion in AUM. We hope to expand our geographic reach and product set across the Asia-Pacific region over time under a rebranded Ares Asia. We are investing in expanding our investing capabilities to mirror what we have in the U.S. and Europe, including recent growth initiatives in real estate, growth equity, secondaries, alternative credit and infrastructure.
In addition to our regular quarterly materials, we posted a supplemental deck which reclassifies historical financial results to reflect the Ares SSG business within our credit group. Since this business is now wholly owned by Ares, we include the former Ares SSG credit funds within our existing credit segment. Before I pass the call back over to Mike, I wanted to reiterate that based on our fundraising and deployment outlook, we remain on track with our growth objectives and the financial guidance that we provided on our last earnings call. Mike?
Thanks, Jarrod. In 2022, we focused on investing in the talent and the infrastructure needed to support our significant fundraising and deployment ambitions for the next several years. This year, we're now focused on executing on these goals, and we're off to a great start with several of our important fundraisers, which we believe will set us up for strong growth for the remainder of this year and beyond. We've also made great strides in broadening our product suite, both organically and through strategic acquisitions over the past few years. We're pleased to have fully integrated these acquired platforms and we're on plan with our strategic and financial objectives. We're now in the process of scaling these businesses with new products and other synergies.
We've already executed on several of our growth objectives, including the launch of our Australian direct lending and credit secondary strategies in the institutional channel, along with the formation of AWMS and the launches of our Private Markets Fund and our non-traded BDC in the wealth channel. We also have exciting growth plans for our infrastructure debt strategy. In conclusion, we believe that our business is well positioned to take advantage of the volatile market backdrop. Looking at our historical performance, some of the fastest periods of our growth have come during recessions and market dislocations. I believe that we're better equipped than ever as we potentially approach another similar period. Currently, we have more available capital, a larger team, and more tools in our toolbox, which we believe positions us well to take advantage of the many opportunities that we expect to see in this market environment.
Our long-term capital, flexibility and scale, asset-light balance sheet, and robust investment in portfolio management capabilities puts us in the position to be opportunistic when others cannot. As always, I'm grateful for the hard work and dedication of our team, and I'm appreciative of our investors' continuing support for our company. Operator, I think we can now open up the line for questions.
Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for our first question. The first question comes from Craig Siegenthaler with Bank of America. Please proceed.
Hey, Mike. Hope everyone's doing well. Congrats on the ACIF launch. My first one is on fundraising. Your institutional sales teams must be very busy at this moment, raising multiple flagships in parallel. Can you comment on interest levels between your credit funds and then your private equity fund and also how re-up conversations are trending? I'm especially interested in ACOF VII.
Sure. Obviously, we don't comment on specific funds in the market, so maybe I'll just give you a couple of themes to think about. Obviously, you saw what we accomplished in our core commingled credit funds with some pretty meaningful and quick first closes relative to prior fund size for the alternative credit vehicle, as well as the European credit vehicle. As we talked about in the prepared remarks, you know, 90% of the commitments that came in in the quarter were from existings. That should give you a pretty good indication for, you know, the re-up appetite and the receptivity from our existings. Also, you saw just since quarter end, in those two funds alone, we brought in commitments of an additional $5 billion+, that momentum continues.
I would say generally speaking, all things private credit are being very well received, not surprisingly, given the defensive position of the asset class, the benefit from rising interest rates, the ability to deploy more actively in a lower transaction environment. I would again expect that to continue both for institutional and retail. We are seeing from investors, I don't know if I would call it reduced appetite for private equity, but reduced ability to invest in pure regular way private equity. What I mean by that would just be non-differentiated growth buyout, and that's largely a function of the transaction environment, money not coming back to those LPs, and therefore denominator effect. We're still in the early days of our private equity fundraise, but I would remind you that we have a pretty differentiated approach.
Obviously, we've been in that business for over 20 years with a consistent track record, but we do have a distress for control capability in that fund, and that fund actively invests alongside our successful SOF franchise. You know, our expectation and hope are that given the ability for that strategy to play distressed and opportunistic the way a lot of our credit strategies are, that we'll have a differentiated experience, but still too early to tell.
Thanks, Mike. Then just kind of refocusing that within credit, how are you seeing demand trend between private credit and liquid credit, really just given a perceived valuation discount now on the liquid side? I know some of your liquid funds tend to be in open vehicles that are redeemable. On the sales front, are you seeing any sort of shift in the demand to the liquid side?
It's a good question. We've actually we saw really good inflows on our liquid credit business in the first quarter. I think to your point, people do see the value opportunity in the liquid credit markets. I'd also point out if you look at our core private credit funds, ASOF, Pathfinder, even ARCC, those funds all have the ability to flex between liquid and illiquid. You should expect that when the public markets are offering significantly better value, we'll be spending time there and then obviously harvesting those gains to redeploy into the private side of the house when that deployment opportunity picks up. There is a fair amount of dynamism in the existing quote-unquote private funds that are taking advantage of that liquid market opportunity.
I think our investors see that, and that's reflected in the fundraising as well.
Great. Thanks, Mike.
Thanks, Craig.
Our next question comes from Adam Beatty with UBS. Please proceed.
Thank you and good morning. Just wanna ask about redemption requests in the wealth management channel, which seem to have ticked up somewhat, although acknowledging that positive net flows are obviously still a very good thing given the backdrop. Just wondering what you're seeing as the motivation or drivers for the elevated redemption request. Is it specific to the real estate asset class or just client liquidity needs or what have you? It'd be great to get your thoughts on that. Thank you.
It's a good question, Adam. Again, you know, we've I think we're fortunate and differentiated from some of the peers in that we are continuing to see net flows in both the REIT complex as well as the credit interval fund. As we highlighted, we have recently launched our non-traded BDC with $1.5 billion of capital, and we're bringing that into the retail channel in the back half of the year and, you know, expect healthy demand there. Seeing the flows, it would tell you that the appetite within the channel for alts is still intact. We do know that in talking to, you know, the top of the house at most of the large wealth and RIA platforms that the desire to grow alt exposure is also intact.
When you look at what's going on, we never really know the motivation for redemption. I think some of the early redemptions we saw in peer portfolios was less a comment on the market and more that some of those folks owned the REIT shares on leverage, and they were getting redeemed and, you know, there was a little bit of leverage unwind coming out of certain geographies. I think now it's probably a combination of the two things that you highlighted, Adam, which is just a general commentary on perceived, you know, risk and opportunity in the commercial real estate market. Obviously, you know, client liquidity. I can't apportion, you know, the outflows to those two in any quantitative way. I think those are definitely at play.
I will say, you know, just looking at some of the peer data and the market data, it does appear that some of those outflows are slowing. I think when we get to stabilized rates, and stabilized cap rates that, you know, you'd hopefully see that trend reverse.
Excellent. Thank you, Mike. That's helpful. I just wanted to turn to Aspida and annuity underwriting and just kinda what you see as the growth capacity there. It can be, you know, somewhat at least, resource intensive to, you know, to do annuity originations, just how much you're growing kinda capacity there, and then assuming some productivity improvement will layer onto that. Thanks.
I think one of the things that we've tried to articulate, but I don't know if it's appreciated, is one of the benefits of the way that we've organically built the Aspida platform, as we talked about in the prepared remarks, is we're not dealing with surrenders or legacy book challenges. We also have a fully tech-enabled paperless insurance platform, which actually is pretty efficient in terms of managing annuity sales and scaling. You know, telling you what you probably know, we have the ability to accelerate or moderate sales, you know, based on price and structure of the product offering. Depending on where we are in terms of our deployment or a view on the yield opportunity on the asset side, you know, we'll push and pull on it.
To give you some perspective, in the first quarter, we were doing about $600 million per month, in new annuity sales, just to give you a sense for capacity on the platform in this type of market environment.
Excellent. That helps a lot. Thank you, Mike.
Yep.
Our next question comes from Alex Blostein with Goldman Sachs. Please proceed.
Hey, Mike and everybody. Thanks for taking the question. First question wanted to zone in on kind of the current environment and the fact that dislocation in the regional bank space is likely to have longer lasting effects, I guess, on credit availability broadly across the market. With that in mind, just curious to get your thoughts on what businesses do you expect to get Ares much larger in on the back of some of these kinda rising lending constraints in the space, that might not be as large today, but could be really interesting down the road?
It's a great question, and obviously it, this is purely us speculating, but it's informed by what we've seen in prior cycles. You know, the first phase of this, as we mentioned in the prepared remarks, is that we are seeing a very healthy amount of pipeline building, with the banks themselves as our counterparty on portfolio sales, you know, reg cap trades and various other things just as they navigate the current environment. The biggest beneficiary of this first phase is our alternative credit business. As the banks, both big and small, retreat to kind of their core businesses and exit large, you know, portions of the market.
I think that will create opportunity in the primary market for alt credit, I'd put that probably at the top of the list of, you know, of growth opportunity coming out of this. That being said, when you think about bank behavior and credit contraction, commercial real estate lending, I think will be a significant beneficiary. I think telling you what you know, Alex, if you look at commercial real estate exposures, 70% of commercial real estate loans are held in the banking system. On average, 40% of regional bank balance sheets are commercial real estate loan exposures. If there is credit contraction and stress at the property level, I think that's gonna open up a pretty big opportunity for us globally in and around the commercial real estate lending business.
Needless to say, as the larger banks maybe reduce focus or have the inability to be as aggressive as they have been on the leverage finance side of the house, big beneficiaries there are our SOF franchise and our direct lending franchise. I would also just highlight generally, given the position of our private equity business, both ACOF and ASOF, as we begin to see capital structure distress and operating distress, they're gonna be, you know, big beneficiaries as well. I kinda just mentioned all of our strategies now that I think about it. I would say some are gonna have more direct benefit, but I think this credit contraction is real, and I think it's gonna really drive, you know, more capital into the hands of folks like us.
Got it. That's perfect. makes a ton of sense. Hey, my second question for you guys was around the secondaries business. I know, Mike, you talked about rising pipeline of opportunities there as well, both on the GP side and the LP side. But I guess when we look at the trends recently, management fee growth has been a little bit more muted. Maybe help us bridge kind of the near-term trends and the outlook for kinda that business resuming management fee growth over the next call, I don't know, 18, 24 months.
Sure. The bulk of that, of that, business was the landmark acquisition. We're now 2 years removed from closing. That's been fully integrated, you know, and I would say retooled from a product standpoint, and now we've begun to innovate and grow. The 2 big new products coming off of that platform are our APMF fund, our private markets fund, which is our first private equity-oriented product that we put into the wealth channel. We have high hopes for the long-term growth opportunity there. 2 is the launch of our credit secondaries business, which was always a very big motivator behind the big push into the secondaries market.
Interesting, when you just look at the acquisition, we kind of acquired the current vintage of PE fund midstream, and we're now deploying our 17th fund that was kind of raised during the acquisition and initial integration period. We are currently capital raising for our real estate and infra strategies as well. We're in capital formation mode. Obviously as we begin to have closings on those, you'll begin to see the revenue begin to tick up, both on committed capital and invested capital for the credit strategies. The reason we're so optimistic there is, you know, back to this overarching theme of capital constraint, illiquidity, and denominator effect. You know, we are seeing LPs seriously look at liquidity in the secondary market.
I would expect that 2023 will likely be a record year for LP-led secondaries, just based on what we're seeing year to date, and the way the pipeline is developing. Needless to say, the pricing on that market is more attractive than it's been in a long time, and we're seeing the market bid kind of 85%-90% for PE and maybe 70%-75% for venture. There's a real value opportunity there. Then on the GP side, for those GPs that are, you know, in between funds or experiencing a slower capital raise for their next fund, getting into the GP-led side of the house with things like continuation funds and NAV loans, we think is gonna turn on in earnest as well. That pipeline is building.
I think the supply-demand dynamic in that market is extraordinarily good.
That's great color. Thanks so much.
Thanks, Alex.
Our next question comes from Michael Cyprys with Morgan Stanley. Please proceed.
Hey, good morning. Thanks for taking the question. Maybe circling back to some of the commentary on the banks pulling back and the opportunity set there. If banks continue to pull back and tighten lending standards, it would seem like on one hand, that leaves a void in the market where firms like yourself and private credit can step in. You mentioned some areas that you're excited in CRE and alt credit, but how much of a void can the private markets and Ares fill? On the other hand, you also borrow from the banks across a number of your businesses. Maybe you can remind us where you borrow from the banks and what sort of impact that could have if they were to tighten standards for you.
Sure. It's an astute question. we do borrow from the banks, you know, probably 60%-65% of where we borrow is to leverage our private credit portfolios. Similarly, I'd probably venture to say 60%-65% of that borrow is from the GSIBs. I think in markets like this, as we consolidate share, I think you're gonna see the GSIBs consolidate share as well and, you know, probably do more business with the larger platforms. My hope is that even with a overall shrinking of capital availability, that Ares and those like us will get a disproportionate share of that, of that balance sheet.
The implication, though, is that if that leverage is not available, obviously, given the return expectations of our investors, that just means higher unlevered ROAs in the market, which means valuations need to continue to come down to meet that market reality, which is obviously deflationary. I would say the same for just the basic capital constraint that we already talked about. Obviously, I don't think that the private markets can absorb, you know, the entirety of that channel, nor should they. Obviously, we live symbiotically with the banks, as partners in a lot of the things that we do. If you look at C&I loans across the entire banking landscape, they're pushing $3 trillion today. You know, if you look at private credit installed base in the US market, it's about $1 trillion.
you know, there's gonna need to be a pretty significant amount of capital formation in order for the private markets to really fill the void if it's significant. you know, it could challenge the economy. I think the flip side of that is, obviously, the private markets will get an opportunity to be extremely selective in the risks that they wanna take and what they wanna get paid for that risk if capital is scarce. I think that's one of the reasons why we're so excited about the backdrop. I would expect that we're gonna get higher risk-adjusted returns for higher quality borrowers and assets than we've seen in a long time.
Great. Thanks. Just a follow-up question on CRE. clearly a lot of concern out there in the marketplace around commercial real estate. What are some of the key risks that you guys see across the space as you look out? How do you see that playing out so far? What are some of the signposts you guys are looking for? Maybe you can help quantify what sort of opportunities that could that be for Ares over time?
I'll give you my thoughts. Bill Benjamin, our Global Head of Real Estate, is on as well, he could probably do a deeper dive. I think you can't look at all segments of commercial real estate as equal, and you can't look at the geographies the same way either. Obviously, office is severely challenged right now. Whereas as we mentioned in the prepared remarks, you know, industrial and most of the multifamily sectors that we're participating in are still seeing good fundamental strength. Europe is showing some differentiation from the U.S. European office, we're not quite seeing the same, you know, work-from-home stresses and supply-demand imbalances there. European retail actually starting to get a little bit more interesting. There's also a bifurcation between U.S. and Europe.
I think the biggest issue, frankly, is you have a broadly leveraged asset class with base rates that are up 500 basis points. You know, you're seeing, and we see this in our primary market, unlevered debt yields in that market, you know, 9.5%-10%+ and that just becomes, you know, really difficult to support if you're an equity owner of a challenged piece of real estate and obviously has a pretty significant implication for future value. That market is gonna have to go through a pretty significant period of, you know, repricing and deleveraging. You know, there are a handful of maturities that are gonna be coming up here in the next 12-24 months that, you know, that will continue to stress the market.
Bill, I'll kick it to you to tack on to that.
Thanks, Mike. I would be echoing much of what has been said already. I think that the biggest risk is the fundamentals in the office market, where we are thankfully on a global basis, very underexposed. It's less than 10% of our net asset value, and it's only 2% in the U.S., I believe. But the contraction of credit that was touched upon a few minutes ago, it will make our life a little bit more challenging for the next 24-36 months, but it'll be an opportunity for our growing debt business. The milestones that we're looking for is a bottoming out on values. I'm not sure we're there yet, and I don't wanna call it, but what we're seeing are moderating.
We're seeing discount rates and terminal cap rates in the third-party valuations we are getting for much of our portfolio, embedding a lot of equity risk premium. We think values are coming, and we wanna see more realistic selling in the market. There's opportunistic purchases from funds that have gates coming down or at the end of their life, and sponsors are either very in the money or very out of the money. We'd like to see a bit more liquidity in the market and realism in the sales market. Continued strong leasing in the sectors that Mike, you know, that Mike touched upon. We have a growing student exposure both in the U.S. and in Europe, and leasing is done about now or a little bit earlier for the next academic year. We are
Way, way ahead of where we've been in prior years. That's a sector that we are very bullish on as well. Office fundamentals and availability of capital are the biggest risks. The ability to use capital either in our debt or in structured subordinated equity positions, in our other funds are gonna create very good opportunities.
Great. Thank you.
Thanks, Bill.
Our next question comes from Brian McKenna with JMP Securities. Please proceed.
Great, thanks. There's clearly a lot of focus on private credit right now. Just given everything going on, going on in the backdrop more broadly, there's a lot of opportunities within this part of the industry. We're starting to see more and more new players coming into the space. It would be great just to get your updated thoughts on the competitive landscape, for private credit specifically, and then how you kind of see it evolving over time.
Yeah. I think you have to, you know, find the signal through the noise because there's a lot of folks that are hanging a shingle in the private credit space that are not really forming capital of any significance or building the necessary origination investment and portfolio management infrastructure to scale. I think the large entrenched players are the players, and there will be some folks that, you know, nibble around the edges. I would say from a competitive set, we're not seeing significant new entrants taking share. We have a number of entrenched competitors that are undercapitalized right now, so we're actually seeing, you know, some reduced capital in the market, which we think will benefit us given where we are in our fundraising cycle. Yeah, I would say not a significant change.
This is not a market that you just jump into, right? If you look at what we've been building here over the last 20+ years in our US business, we have 180 people. We're actively calling on 500 private equity sponsors in our private credit direct lending business. We've deployed, you know, over $100 billion with, you know, incredible performance. You can't really replicate that, both from a track record relationship and, you know, expense standpoint. You know, as I said earlier, I would expect that market share will continue to consolidate behind the scale players like it has in every other, you know, cycle that we've experienced. I would highlight that that's true in Europe as well, where we probably have an even greater leadership position across the private credit landscape.
Yeah, very helpful. Thanks, Mike. And then just to follow up on the new non-traded BDC that you launched, could you just talk about early demand and feedback for this product in the current environment that we're in? Then what's the ramp going to look like in terms of adding new distribution partners over the next 12-18 months?
Yeah. Again, too early to tell. We took the approach of seeding the fund to get it scaled so that when we took it into the wealth channel, people would see the portfolio, and we would not have to deal with any meaningful J-curve issue as we supported the growing dividend there. As we talked about, you know, we have $1.5 billion of capital already in there through the seeding of that fund. It formally launched a week ago, and as we talked about in the prepared remarks, we have our first retail distribution partner coming online in Q2. I think on the next earnings call, we'll have a better sense for kind of what the steady state demand is out of that first distribution partner.
Again, if you believe that private credit is in demand, and that the wealth channel is underallocated to private credit similar to the institutions, I think given our brand and given the track record of performance that we've demonstrated, in ARCC over the last 19 years, that the demand will be there. We'll have a much better sense the next time we're all together once we get the product into the channel.
Got it. Thank you.
Our next question comes from Benjamin Budish with Barclays. Please proceed.
Hi there. Thanks so much for taking the question. I wanted to check back on the European waterfall opportunity. It sounds like you're still quite confident on the outlook for this year. Can you maybe just remind us how much of the longer-term look comes from private equity versus credit? Just so we can kind of get a better sense of, you know, what is the risk as we look farther out that, you know, those targets may be easily achievable, more challenging, any color you could provide there?
Sure. Thanks, Ben. Great to hear from you. Yeah, we still, as I reiterated in our prepared remarks, we're still pretty confident about that end of the year amount. I'll remind you, and I touched on it a little bit in my comments, that we're still in the early stages of the harvest period. As we enter more into the later stages of the harvest period, that's when you are kind of removing that seasonality that we see. Right now, the seasonality means that we see larger tax-related payments that happen in the fourth quarter with a true-up to the tax actual payments that happen here in the second quarter. That's what drove my prepared remarks. We still reiterated the guidance for this year.
In terms of that long-term amount that we laid out, for you and put into the presentation that you can find on our investor relations website, about 75% of that balance is from credit-oriented. The majority or the vast majority of it's really coming from our credit-oriented funds.
That's what allows us to have that high predictability in terms of what we believe the balance will ultimately be. It's always a little bit subjective in terms of when that will occur once you enter into that full harvest mode. It becomes a much more predictable balance.
Got it. That's helpful. Thanks. Maybe one more kind of tactical question just about what happened in Q1. I think you mentioned the, you know, the nearly $13 billion of deployment was on track versus your initial expectations. Just curious to what extent did March sort of, you know, result in a bit of a slowdown, and perhaps to what degree were you ahead of track in January and February such that you sort of ended up the quarter where you thought you'd be?
You know, when you take...
It's interesting because.
Go ahead.
Yeah, go ahead, Jarrod. I'll chime in after. Go ahead.
Yeah, absolutely. I'd say the one thing that's important to remember is that Q1 is always seasonally slow. As we looked at Q4 of last year and coming into Q1, we were expecting a little bit of a slowdown time. Then, you know, for the last few years, you've always had something happen in that February-March timeframe that's resulted in a little bit of slowness. We had the banking issues in that sector, which did create just a little bit of time. Overall, I think as we mentioned on the prepared remarks, you've seen our pipelines begin to build in direct lending. You've seen, you know, there's a little bit more activity that's beginning to happen.
It's kind of what we see every year around this time, but it was overall a slower quarter, and that was in line with what we expected.
Got it. thanks so much.
Our next question comes from Kenneth Lee with RBC Capital Markets. Please proceed.
Hi. Thanks for taking my question. Just to piggyback on the previous question around capital deployment, wondering if you could just share your thoughts on how aggressive could you be in terms of deploying capital within private credit or direct lending, given especially given very attractive terms and spreads and the current macro backdrop. Thanks.
Sure. I don't know how to say aggressive. I think if you look at the size and scale of those businesses, obviously there's a pretty consistent amount of deployment. If you look, you know, year on year, LTM deployment for U.S. direct lending was $32 billion. In 2022, it's about $25 billion right now. European was $12 billion, now it's close to $14 billion, so that's showing a little bit of growth. You know, those businesses are at a scale now where there's some pretty steady deployment. You know, we've talked about this before, 50% or so of deployment opportunities in those businesses is coming from within the existing portfolio, either as companies deleverage and look to releverage, execute on a growth plan, go through a change of ownership.
There's a, there's an embedded pipeline of opportunity just given the size and diversification that exists in the existing portfolios. The market is definitely coming our way, and so I think as we scale capital, that should also have the impact of scaling deployment. You know, as we're getting these funds into the market and having successful closings, that sets us up, you know, to be a little more, quote-unquote, "aggressive," as you said, on the deployment side as well.
Gotcha. Very helpful there. One follow-up. You know, perhaps wondering if you could just tell us what you're seeing in terms of recent direct lending trends within Europe or Asia, especially given the announcement about the SSG business. Maybe highlight some of the key differences you're seeing with what you're seeing within the U.S. Thanks.
Yeah. You know, I would say U.S. and Europe are kind of in line right now in terms of the structure of new loans and the risk return that we're generating, you know, and the performance of the existing portfolios. We're pleased with the consistency. Particularly I think some of the concerns that folks were having around, you know, more challenging economic backdrop in the Eurozone, we're just not seeing that roll through the portfolios or the transaction activity. You know, just to put things in perspective, which is why people are so excited, you know, most new loans in those markets are getting priced on a first lien basis somewhere between SOFR 550 and 575 at lower attachment points and better structures with 3 points of fee and some modest call protection in many cases.
Back of the envelope math is, you know, pretty high quality first lien loan is getting priced in the 11.5%-12% range. Then obviously to the extent that that bleeds into second lien or unitranche, you're now into the, you know, the mid-teens unlevered. It's pretty compelling, particularly in a market where it's just difficult to price equity risk. Asia Pacific, it's hard to say because it's different by country and by region. I'd say the, the regular way acquisition finance business in Australia and New Zealand, which is a more mature capital market and buyout market, we're seeing similar types of trends, both on credit and deployment.
I would say in other parts of the market, it's much more of a special sits and opportunistic credit play, which really speaks to the strength of the legacy SSG team over there. The APAC opportunity, you know, it's not as robust from a, you know, accretive standpoint, but probably offering more consistent opportunistic plays across the, across the region.
Gotcha. Very helpful there. Thanks again.
Thanks.
Our next question comes from Mike Brown with KBW. Please proceed.
Okay, great. Thanks for taking my questions. Just looking at the investment income line in the real asset segment, this quarter looks like it was impacted by subdued activity in the debt markets. Based on some of the real estate commentary you guys made earlier in Q&A, it does sound like activity there remains relatively subdued. If that continues to remain weak here, should we expect a repeat of 1Q for that line in the second quarter? You know, what should we be looking at in the public market or monitoring just to keep an eye on when that activity would pick up?
Mike, you want me to take that?
Yes, I can chime in after.
Yeah. Taking a look at that, it's really hard to predict because most of what we have in our investment income is a result of us seeding funds or our GP stakes in funds that ultimately weren't taken as employee co-invest. There is a episodic nature of when we recognize some things. In terms of some of the vehicles that we have in there that are more debt-oriented, there is some expense that comes through just on the use of leverage that's in there and on the use of line fees. If we don't actually have a transaction that comes through, we still obviously have to pay that line fee. It is hard to predict from quarter to quarter what exactly that will be.
We typically do have sales throughout every period, as Bill and Mike both mentioned earlier. As the market thaws or as there's an opportunity to sell assets, some of our more legacy funds may take advantage of that, but it's really hard to predict exactly when that'll occur.
Okay, great. You know, great to get the update on what you guys are seeing from a credit perspective in your portfolios. I guess we're also kind of contending with, you know, where are the credit risks going to emerge next? You know, from your vantage point, where do you think that may occur? It sounds like, you know, real estate is still, of course, where some of the challenges will probably continue to arise. As you look out over the next 12 to 18 months, what are you guys thinking about in terms of how credit could evolve from here?
Look, your crystal ball is as good as ours. you know, I think real estate, you know, again, certain sectors of real estate is probably the easiest to see just given the leverage profile, and debt yields in that market. I think we could see a weakening of the, you know, kind of lower end of the consumer market. I don't think we have exposure there, but that could present some opportunities in our alt credit business. you know, kind of on the middle market side, you know, as I said, we're not seeing it. We had 8% EBITDA growth in our ARCC book, which again is a good proxy for the U.S. direct lending business. In our private equity franchise, we saw 5%-10% EBITDA growth.
The earnings are coming through. I think some of the inflationary pressures are abating. If you look at the stresses in the corporate market right now, it's really about over-levered balance sheets and a 500 basis point increase in base rates in 12 months, more than it's about earnings recession. For better or for worse, we've been the big beneficiary of that increase in base rates. When we're coming to the table talking to our partners on the equity side, you know, as a counterparty on a loan, it's typically around how do we relieve cash burden of the capital structure in exchange for other compensation.
It is a different setup than we've seen in prior cycles, where typically when we're talking about defaults, earnings are falling out of bed and rates are coming down, so we're giving away return while we're dealing with operational distress. Most of the conversations now are really about just capital structure flexibility and the inability for folks to service their existing capital structures. That's an easier conversation. Frankly, it's an easier risk to box right now, and that's generally what the conversations have been on the, you know, the bulk of the corporate loan book.
Okay, great. I really appreciate the thoughts, Mike.
Sure. Thanks.
Our next question comes from Luke Holm with BMO Capital. Please proceed.
Hey, good morning. Probably a question for Jarrod. I wanted to come back to some of the comments you made around investments that you've been making in the platform over the past couple of years, and I was hoping you could spend a minute on how we should think about that translating in terms of compensation and G&A growth for the rest of 2023, and how that might play into the FRE margin outlook. Thank you.
Sure. You can kind of quantify the investments in a number of different manners. Obviously, the acquisitions that we've had over the last couple of years are investments where we've used our balance sheet capital for that. There's also other investments, for example, taking a GP stake in new funds as you launch into a new strategy or you enter into a joint venture with a partner to launch that strategy. Often that can come with a lot of internal resources so that it is not depreciative to your FRE margins. It can actually ultimately be very accretive to those margins because you might be branching out a strategy in-
An area where you're already where you already have activity for something like our Sports Media and Entertainment Fund, where we already have individuals involved, and we're able to launch a new vehicle off of that. You could have something like our credit secondaries business, where we're able to use people from our credit business, as well as bringing in some outside people and using some of the internal secondaries professionals to build a new strategy within that. Those amounts, those are a little bit harder to quantify in terms of how your, how your FRE is ultimately impacted at the outset. What you do see is the use of capital from the balance sheet, to make investments or to make co-investments along with joint ventures.
As we've talked about in the last couple calls, really where we were in 2021 and 2022 was we knew that we were going to have some very large commingled products coming to the market over this year. We knew that we needed to prepare as a business for those and begin to hire and build out the ability to source and originate as well as to serve through the back and middle offices That hiring is what led to our extreme headcount increases over the last couple years. As we talked about it at year-end, that we thought that that would moderate into this year as we really digested those hires and began to raise and then deploy those new larger commingled funds.
That's really what's gone into the FRE guidance that we've talked a little bit about saying that we're still on pace for that 45% run rate that we laid out at our Investor Day at 2025. In addition, as we see us coming to that, we believe that the second half of this year will really begin to see the margin expansion as we see that deployment ramp more earnestly.
Thanks, Jarrod.
Yeah.
Thank you. There are no further questions at this time. I would like to turn the floor back over to Michael Arougheti for closing comments.
Don't have any other than just wanna thank everybody for their time today. Look forward to speaking again in a couple of months and hopefully have some great updates. Talk to everybody soon. Thank you.
Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available through May 26, 2023 by dialing 877-660-6853. For international callers, by dialing 1-201-612-7415. For all replays, please reference conference number 13,736,874. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. You may now disconnect.