Q1 2020 Ares Management Corp Earnings Call
Good day, and welcome to Aries management corporations first quarter earnings Conference call.
At this time, all participants are in listen only mode.
As a reminder, this conference call is being recorded on Wednesday may six 2020.
Well now turn the conference over to Mr., Carl Drake had a public company Investor Relations for Harry's management.
Good afternoon, and thank you for joining us today for first quarter 2020 conference call. We hope everyone is safe and healthy I'm joined today by my clever getting our Chief Executive Officer, Michael Mcferran, Our Chief operating officer in Chief Financial Officer.
Question Bennett Rosenthal co chairman of our property group Kipp Deveer head of our credit group. So Benjamin said about real estate group, Scott grapes can have a private equity group and special opportunities.
Joel singer collateral term credit will be available for the question answer session.
Before we begin I would remind you the comments made during this call contain forward looking statements that are subject to risks and uncertainties, including those identified our risk factors interests you see filings.
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.
During this call we refer to certain non-GAAP financial measures, which should not be considered in isolation chrome or as a substitute for measures prepared in accordance with generally accepted accounting principles. In addition, please note that our management piece include Air Sea Port Wuxi.
Please refer to our first quarter earnings presentation available on the Investor resources section of the website for reconciliations of the measures to most directly comparable GAAP measures.
No nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Aries fund.
This morning, we announced that we declared our second quarter common dividend of 40 cents per share representing an increase of 25% over prior years quarterly dividends.
Dividend will be paid on June thirtyth 2020 to holders of record on June 16th.
Also declared a quarterly preferred dividend at 43.75 cents per series, a preferred share which is payable on June thirtyth 2020 to holders of record on June 15th.
Now I'll turn the call over to Michael ever get Eagle will start with some quarterly financial and business highlights.
Thank you Carl and good afternoon, everyone.
We wish everyone well during these unprecedented in difficult times and our thoughts are with those who have been affected by this crisis.
I want to take the first responders health care professionals and those on the front lines risking their lives through our communities across the globe.
I also want to thank all of our employees here at area. So we're working harder than ever to drive our company forward through this challenge.
It's really been remarkable to see the seamless transition our entire from has made to working remotely and we are functioning at full capacity.
I would not be more proud of the team.
It's also nice to see so many of our portfolio companies directly supporting our communities, whether it's two page medical which is running the clinical operations for Kobin tree Gosh Center in Chicago's Mccormick Convention center, and delivering high quality and save care for non cobot patients throughout the shelf in place period or convergent technologies.
Example, delivering solutions to enhance helped security thermal cameras contact whats access controls and identity management and tracking software.
With respect to Aries I'm going to spend a few minutes on why we believe we're uniquely positioned to navigate this period, all sensibly and defensively.
Our team in areas is broad eat and it's worked together for a long time, including through past economic cycles.
And as Weve demonstrated consistent live during her tenure, we're very experienced navigating different and challenging economic environments.
As many of you know we grew faster through the GFC than in any two year period. Since then with 80 women management fees, increasing it compounded annual growth rates.
39% and 28% respectively from 2007 to 2009.
So what we're all witnessing now is unique in many respects our framework for navigating and responding to crises is well established.
Centers first and foremost rounder cultural collaboration.
Information ideas and market insights flow across our platform through both recurring committee meetings town halls, working groups and nimble point to point and cross team interactions.
This has enabled us to navigate the early days this crisis extraordinarily well.
We've also had eight weeks across portfolio company calls to ensure that we're sharing best practices on employee in public health issues technology government regulatory matters supply chain management, yes, she et cetera.
This all exemplifies what you often hear us referred to as the power of our platform, which supports exploring ideas and solving problems and pursuing opportunities across our businesses geographies and our controlled portfolio companies.
Now more than ever we're relying on our collaborative culture to deliver optimal outcomes for all of our stakeholders.
Our first quarter, Mark several financial milestones that Mike will cover in further detail.
Our results also reflect our resilient and cycle tested model.
The first quarter was our twelveth consecutive quarter of sequential fee related earnings growth within our reach 93.1 million an increase of 31% when the same period last year.
In addition to reporting record at Bari. The first quarter was also a new record for management fees, a new record Ari margin since going public record fee paying AUM, which crossed 100 billion for the first time, our history and our second highest real life income.
In addition fund raising is off to a very strong start with over 6.6 billion raised during a quarter.
I do want to highlight certain key characteristics of our business that not only supported strong first quarter results, but also position us well going forward.
First we have a management's be centric business model with most of our revenue coming from management fees that are primarily generated from permanent capital vehicles and long dated close end fund structures.
We experienced limited capital outflows and our management fees are generally well insulated from mark to market fluctuations as we saw this past quarter.
This provides us great visibility to growing fee related earnings and dividends.
Second in addition to managing long dated in permanent capital, we have always had a bias toward structuring funds and other mandates to be as flexible as possible.
It allows us to invest between liquid and illiquid strategies across capital structures and to pivot between regular way investing and special opportunities are distressed investing during periods of volatility.
Third we tend to run our funds with a significant amount of dry powder generally begin raising successor funds when predecessor funds are about 60% to 70% Floyd.
We went into the crisis with significant available capital to invest and we ended the first quarter with approximately $33 billion dry powder.
Next similar kept the fund level. We also believe in maintaining significant excess liquidity at the management company, we run a balance sheet light model.
For many reasons that weve never aspire to have a large balance sheet that takes outsize positions and investments instead.
We pursued a balance sheet strategy that focuses on activities intended to grow our core earnings.
Our balance sheet is strong with available liquidity of over 1.4 billion.
No near term debt maturities, no net leverage and no leverage with mark to market or similar attributes that would ever require us having to margin calls or other fundings.
Our liquidity positions us well the capitalize on potential strategic growth opportunities that this market should present to us.
And last or net realized performance fees are primarily driven by realizations from our closed end funds.
Our long term locked up capital needs that we are not forced sellers of assets and while valuations can move up or down they reflect unrealized estimated fair value at any point in time and are not necessarily reflective of where we would or expect to monetize investments in our funds in the future.
On a related note our capital base is meaningfully over weighted to more resilient credit they strategies that invest at the top of the capital structure and by definition and take the last loss on investment.
Not only just credit provide more stability in values like it is also easier and quicker to deploy and volatile markets when equity risk is more difficult to price.
Now turning to the markets, we expect the impact of the cobot 19 pandemic to impact the economy.
General phases, and I'll discuss how areas has responded or plans to respond to each phase.
In the first phase beginning in early March and continuing through the end of the first quarter, we witnessed severe disruption and market prices.
It began with the equity markets bled into the high yield and leverage loan markets and then across the spectrum of almost all risk assets, including the private markets.
The healthcare crisis, and government shutdowns triggered almost immediate impacts the liquidity at businesses.
And the disruption impact in nearly every company to varying degrees.
Fortunately as a percent of our firm wide 80, when we have relatively small exposure to the quote unquote ground zero.
Industry's most heavily impacted assets, such as oil and gas travel and leisure and retail, but we're certainly not immune.
In this first phase we focused on doing everything we could to understand the liquidity needs of our portfolio companies and to protect value in the existing book.
On the investing front, we began actively using our dry powder to invest in and trade distressed assets, while retaining significant dry powder for what we believed would be a long drawn out recessionary environment.
In the second phase, where we believe we are now significant fiscal and monetary stimulus has been announced and it's finding its way into the markets and the economy, albeit in some cases unevenly and slowing.
Following this massive fiscal and monetary response, there's been a meaningful rally in the public equity and credit markets, which began in late March.
But we would argue that the recent performance in many markets is at odds with the current fundamental economic reality.
What did he has not yet reach certain segments effectively and a significant need for rescue capital and liquidity remains across the private markets.
This period of stagnation could be with us for the foreseeable future and it could result in an extended period of continued market volatility due to the depth of the man shock on our consumer driven economy.
This market environment plays into our strong relationships across the private markets of North America, Europe and soon to be Asia.
In general we're focused on providing rescue capital primarily to high quality second order impact companies or those companies not in the most affected industries, we continue to find some attractive opportunities in the liquid markets as well.
And in the third phase once a significant percentage of the working population is fully back to work, we expect to return to a quote unquote new normal market environment.
We would then envision a prolonged period with less competition, where we'll be able to invest in great companies in assets at attractive values.
Importantly, we believe that our flexible strategy with the ability to invest in liquid and illiquid assets using our deep research and private markets expertise works well in all stages.
Our investment strategy flexes to a particular market environment, which is why we strive in so many diverse environments of our company's history.
Many of you have asked us about fund raising in this environment.
The good news is that we've continued our fund raising momentum even after the outbreak of the pandemic.
For example, five of our Commingled fund together closed on more than $2 billion capital in the month of March and then during April and into early May we've received additional inflows of approximately 2 billion across strategies and our credit private equity and real estate groups.
We continue to expect a strong fund raising year in 2020.
Our past success has been driven in part by expanding relationships with our existing clients through re ups into larger existing strategies and new capital into other areas strategies.
Starkly existing investors have accounted for 70% to 80% of our fundraising each year since our IPO.
The first quarter was no exception as our direct fund raising from existing investors accounted for 74% of our total quarterly fund raising.
This puts us in an advantageous competitive position in the current virtual environment as Lps in general are more focused on re ups to existing funds or new commitments to existing managers rolling out new funds.
We're fortunate to be in a position with a large number of successor funds coupled with an actionable new funds that can invest well in this market environment.
Some of our best performing funds into just were raised and deployed during the last global financial crisis, and I think investors recognize the attractive investment opportunities that can arise during periods and significant volatility.
As discussed on our call in February we haven't meat eight large successor funds and new commingled funds either in the market pre launched or to be launched within the next six to 12 months.
This includes our special opportunities fund.
Our six corporate private equity fund.
To real estate private equity funds, our alternative credit flagship fund our European direct lending fund, our second junior capital private credit fund and our second U.S. senior direct lending fund.
All together these represent at least $25 billion, an incremental targeted capital all in strategies and formats that actively take advantage of the current and future distressed markets.
Our fundraising efforts will also continue with our strategic managed accounts and strategic partnerships are public funds smaller commingled funds and other closed on vehicles.
We're making significant fundraising progress on our funds that are in the market. Many of which are also seeing an expanded investment opportunity set as a result at the current market dislocation.
Our special opportunities fund, which focuses on illiquid and liquid distressed investing including rescue capital investments has resonated, even more with investors and the current market.
With that in mind, we've closed on approximately $3 billion for this fund, which well exceeds the funds target a 2 billion.
The special opportunities team has been actively deploying capital with $1 billion invested since inception split about happen privately negotiated and half and secondary distressed investments most of which was invested in the last 60 days.
We're also nearing a meaningful first close for our six flexible capital private equity fund.
As a reminder, our flexible capital private equity strategy Hibbitts, primarily between distressed investing and prudently leveraged buyout investing.
Not surprisingly in the current environment. The team is focused almost exclusively on distressed investing and we believe that there's a significant opportunity for this fund to invest in high quality companies that had issues with their balance sheets.
And or are in need of liquidity from a financial sponsor such as areas that can help them chart a path back to growth.
In the midst of the dislocation. We also held additional closings for our U.S. opportunistic real estate PE fund, bringing the total race to date of 1.1 billion against the target of one of the half billion.
This strategy also has a focus on buying stressed high quality real estate assets.
We also held the first closing of more than 500 million euros grow our European value add real estate PE fund and our real estate debt funds continued fund raising with another 400 million that inflows during the first quarter.
We've seen strong interest in our flagship alternative credit fund.
It's fun pursues an opportunistic strategy focused on asset oriented investments.
Given the current market disruption this strategies opportunity set has meaningfully expanded and the size of the investment pipeline materially increased post coping 19.
This fund also includes an innovative feature that allocate at least 10% of the funds performance fees to global health and global education charities.
It's fun was launched last year prior to the global health crisis, and as always contain this profit sharing and charitable mission.
The funding closed on $786 million in March and total capital raised to date stands at approximately 1.3 billion.
We expect to hit or exceed our target of 2 billion in the near future.
Also we just launched our fifth European direct lending fund this week.
Based on our leadership position and the opportunity set in European direct lending. We currently expect that this fund could be the largest private commingled fund in our company's history.
The other credit funds that I mentioned are expected to be launching later in the year or early in 2021. So as you can see we expect a significant fund raising year. Despite the challenges that some investors space.
During the full first quarter, our drawdown funds invested more than 4 billion, mostly across our credit platform and direct lending and alternative credit as we focus off the balance sheet and high quality credits and assets.
With the extreme volatility in the first quarter. We were also very active trading the liquid markets, where distress and dislocation were most prevalent.
Post the cobot outbreak, we traded approximately $5 billion in liquid securities in March an increase of more than 50% year over year, bringing total trading volumes to over $11 billion in the quarter.
This represents a 30% increase from the first quarter of last year and highlights our ability to take advantage of these market dislocations.
Some of the best investment opportunities right now have pivoted into the private markets, where our sourcing advantages in plain even greater role.
It is now important once again to use our relationships to gain access to the highest quality opportunities for companies meeting rescue capital or critical financing for acquisitions in market segment less impacted by the disruption.
We expect deployment to picked up pace throughout the year with a focus across our credit distressed rescue capital alternative credit and opportunistic real estate businesses.
Investment spreads and structures have markedly improved across the credit landscape as many competitors and banks are not open for business, which we believe will position us to boost future returns.
And from a performance standpoint.
Q1 fund performance across our credit PE and real estate strategies naturally reflects the significant disruption that occurred in March.
On a positive note our funds generally exceeded the relevant public market indices.
Our private equity composite was down 9.3%.
Our European in U.S. real estate private equity strategies declined between three and a half and 4.2% respectively.
And our credit strategies decline anywhere from 11.8% and 12.2% on the liquid side to between 0.4% and 7.7% on the direct lending side are significant funds.
Importantly, our investors are patient and they measure are funny performance over much longer time periods and on a realized basis.
Of course, the market volatility that impacted our fund values also may provide opportunities for us to make long term investments at more interesting entry points.
So maybe lastly, before I hand, the call over to Mike I want to provide some updates on certain of our recently announced strategic activities.
As many of you saw we formalized a strategic partnership with Sumitomo Mitsui Financial group and Sumitomo Mitsui Banking Corp. In late March.
We had a longstanding mutually rewarding relationship with SMBC and we had been discussing the potential for strategic partnership for over a year.
Through this partnership we expect to gain strategic distribution in the Japanese market with their broad client base and we can also partner with their significant balance sheet to help us grow existing and to launch new businesses.
We expect a meaningful earnings contribution from the partnership synergies overtime.
He also aligned interest around the partnership the resale of 4.9% of our common equity to SMBC, which we believe will be accretive over the long term.
While the timing coincided with the early days and the crisis, it's our view that this capital even more valuable than it would have been before.
This equity capital puts us in a position to play off sense in this opportunistic investment environment, where we can hopefully scale our business in areas that are highly strategic for us.
Second our SSG capital transaction is proceeding smoothly and we now expect to closing in late June or early July.
With approximately $6 billion and you when.
We're very excited to bring onboard a leading secured and special opportunities investor in the Pan Asian region.
At a time, where we expected to be very opportunistic to invest.
Similar to us they've continued to have on interrupted fund raising.
Third I wanted to provide an update on our insurance solutions initiatives, which as you know we call a speed of financial.
We expect to close the platform acquisition of Onea life in the second quarter or early third quarter.
And there are many interesting acquisition opportunities in the insurance sector and we've been building a pipeline of reinsurance transactions as well.
After closing will soon be prepared to rollout our life insurance and annuity products any environment that will be more advantageous them before as retirees continued to struggle to find quality investment alternatives and insurance products in the current volatile and low interest rate environment.
And now with that I'm going to turn the call over to Mike Mcferran for his remarks on our business positioning and more detail on our financial results Mike.
Thank you, Mike Hello, everyone and thank you for joining our call today.
No words can do justice to explain to extraordinary and tragic nature of what's transpired in recent months I hope all of your safe and well.
While we are doing this call from our respective offsite locations and I missed the in person interaction with my colleagues I will echo mikes comments by saying that the power of our platform with a culture deeply rooted in collaboration has never been more evident or valuable than it is right now.
While our global team continues to work remotely our culture combined with our truly incredible technology and operations teams have this highly effective.
Operating a highly effectively you from our various locations.
I'll start my remarks, just some key points on the quarter and then provide a more comprehensive review of our results and financial position.
As Mike highlighted the first quarter represented our 12 consecutive quarter of fee related earnings growth and reflected some key first time milestones with fee related earnings exceeding 90 million.
Our margin growing to a new high of 34% and our fee paying assets under management exceeding 100 billion.
Valuations across most if not all asset classes global you have been negatively impacted.
Our portfolios were not immune to the broad market dislocation as reduced valuations decreased our net accrued carry from year end levels and reduce the value of our balance sheet portfolio.
The valuations were down as Mike stated, our fonts exceeded their public benchmark indices across our credit private equity and real estate strategies.
Notwithstanding the challenging market backdrop realization stemming primarily from our private equity in real estate businesses enabled us to report 134.1 million of realized income for the quarter, which is our second highest quarter reported real life income since our IPO in 2014.
Now I'll take you through the results in more detail.
Pete related earnings for the quarter totaled 93.1 million, an increase of 31% from the first quarter of 2019.
I'll also note that this represents an increase of 5% from the last quarter, which translates into a 20% annualized growth rate quarter over quarter.
We're off to a good start to the year and I will reiterate our expectation that we expect to grow fee related earnings year over year by 15% or more.
Be related earnings growth was driven by 17% of management fee growth from the prior year period compared to growth and combined compensation and general and administrative expenses of 12%.
The faster growth of management fees versus expenses reflects the nature and lifecycle of our revenue model.
The majority of our AUM from closed end funds pace fees Undeployed capital.
However, we incur expenses on cat, our capital raising investing in operating activities before we achieve ramp revenue ramp as we are deploying the capital which is reflected in a AUM not yet paying fees or shadow 81.
In other words, we are growing management fees, while much of the expense related to that revenue has already been reflected our prior financials.
This enables us to continue to grow our margins, which has highlighted by our how far you margin growing to 34% from 32% for the fourth quarter of last year at 30% for for the first quarter of 2019.
I do want to highlight though we are reiterating the 2020 margin guidance, we gave what I call last quarter, which is that we expect to report a 34% margin for the year and we continue to expect to achieving 35% or better run rate margin during 2020.
With respect to general and administrative expenses. This quarter's results include approximately 3.3 million of expenses related to the ongoing FCC better we discussed last quarter related to certain compliance policies and procedures.
We believe this accounts for all the expenses, we will incur related to this matter.
Second quarter results will reflect an insurance recovery of 2.5 million, which offsets most of the expenses we recognized this quarter.
Notwithstanding this we're seeing reduced you're going to expenses as well as a result to the current environment, most notably from we just travel expenses.
We do expect that through growing operational synergies, including benefits, we are capturing from our technology investments and from our Mumbai office that we opened last year. There for your 2020, DNA expenses should be flat or below the aggregate 178.7 million that we reported for two.
Thousand 19.
Realized income for the quarter totaled 134.1 million, which represents an increase of 29.5 million or 28% as compared to the first quarter of 2019.
After tax real ice income per class a common share net of preferred stock distributions was 45 cents for the first quarter, an increase of 28% from the first quarter of 2019.
Our last quarter's call, we highlighted that we estimate our 2020 effective tax rates to be in a 15% to 18% range for we always income.
And then the 11, 8% range on fee related earnings assuming 100% of our shares were converted to class a common basis.
We still think these estimates are appropriate for 2020.
With respect to net performance income realizations going forward, we have moved from a general market backdrop that was favorable for realizations to one that is not at least for the near term.
Well, while they're still will be opportunities through I think come to exceed fee related earnings. This year current and anticipated market conditions for the foreseeable future are clearly far more conducive to making investments to grow long term value as opposed to harvesting gains today.
Realizations during the first quarter combined with downward fair value adjustments as of March 31st did reduce our net accrued performance fees.
Two 235.5 million at quarter end from 348.2 million as of December 30, Onest 2019.
Given our after our you centric business model fluctuations and performance related income have a minimal impact on our financial liquidity position I do not affect our dividend, which as you know is pegged to AFE already.
Next let me spend a few minutes in our AIU I'm unrelated metrics.
Are you I'm at March 30, Onest totaled 148.6 billion compared to 148.9 billion at December 31st as an increase of 9% from the prior year.
Are you on this quarter benefited from new capital commitments totaling 6.6 billion and our acquisition of CLL management contract agreements totaling 2.7 billion.
Which were offset by 5.7 billion of market value depreciation at 3.7 billion of distributions from income and realizations by our funds during the quarter.
Going forward, we do expect a U M to be partially bolstered by the muted pace of realizations throughout the year.
Okay.
Our fee paying AUM increased over 17% year over year as a meaningful amount of are you I'm, it's been converted to fee paying AUM upon investment.
We ended the first quarter with 102 billion a fee paying AUM, which is a great milestone as it represents a first time in our history that we have exceeded over 100 billion a fee paying AUM.
We ended the quarter with available capital of 33.2 billion, representing approximately 22% of our AUM as of quarter end and had 23.1 billion a value I'm not yet paying fees of which approximately 21 billion as available for future deployment with corresponding annual management fees told.
In 199.8 million.
The last metric I wanted to covered us incentive eligible AUM, which totaled 84.5 billion at quarter end.
This amount to 22.4 billion was incentive generating at 25.9 billion was a uninvested at quarter end.
Well asset price declines in the quarter reduced our crude net performance fees as I previously referenced we believe we are uniquely positioned to create meaningful long term value through future performance fees.
The combination of our dry powder, our broad and diversified proprietary investment sourcing capabilities. The flexible nature of our funds and most importantly, our culture that is deeply rooted in collaboration has us well position in this environment to make investments patiently. The quarters ahead that we believe will be a source of long term.
On time performance fee generation in the years at.
Before handing the call back to Mike I do want to address our financial position as of quarter end.
We ended the quarter with nearly 1.2 billion in cash and cash equivalents at our balance sheet with 800 million drawn against our 1.1 billion revolving credit facility due in 2025.
This gives us more than 1.4 billion of available capital and liquidity as Mike mentioned.
Subsequent to quarter end, we elected to reduce our borrowings under our revolver to 500 million and after this pay down we continue to have an excess of 850 million in cash on our balance sheet.
We sit here say very well capitalized with no net debt no near term debt maturities and no mark to market balance sheet leverage.
We are very well equipped to be nimble as strategically focus to pursue what we believe will be a broad set of unusual opportunities to leverage our capital for growth and the time periods ahead.
With that I wish all of you and your families on loved ones health and safety in this difficult time, I'll hand, the call back to Mike.
Thanks, Mike So in conclusion, we believe that our business model not only resilient, but also well positioned to thrive in what we expect will be a continued volatile market environment.
Our management fee centric model rooted in credit and flexible strategies, coupled with our balance sheet light model and strong balance sheet purchase and a strong position to navigate these times.
It is during these volatile periods that we believe our organization and the power of our platform rice, the occasion and shines through.
We don't view this as being an economic cycle, where we'll simply snap back to yesterday anytime soon rather we project a long you shape recovery and with that an unusual and interestingly period ahead with that share challenges, but also it's your unique investment opportunities.
It's in times like these that having investment sourcing underwriting and portfolio management capabilities are critical and having broad access to capital is key.
And to survive, but not just survive, but to succeed we need to be well positioned with both and we believe that we are.
I Echo mikes comments on wishing everyone safety and health.
I look forward to updating you on our progress on next quarter's call and I'd also like to end by thanking the entire team one last time for all their hard work and dedication. These last couple of weeks as always we appreciate your time and support for the company in your time today and with that operator, we'd like to open up the line for questions.
Thank you we will now begin the question answer session.
At this time, if you would like to ask your question. Please press Star then one on your Touchtone phone if you'd like to withdraw your question. Please press Star then too.
Our first question stay will come from Robert Lee with KBW. Please go ahead.
Great. Thanks, guys.
Doing well and the.
Challenging environment.
For Europe.
Yes. Thank you maybe just my confusion all the comments on fund raising but maybe going back.
A little Big do you have a lot of things still in process.
If we maybe a little more granular color just somehow maybe the timing or a you know.
The impact that versus kind of what you would have bought on the fourth quarter call.
Sure the round.
The larger funds you funds.
Feel like you can take extra couple of quarters or.
I feel like given your.
Flexible mandate you know it could happen.
Regionally.
Yeah as of now everything is closing kind of as originally scheduled at at target size and as you heard in the prepared remarks, we've actually been pleased.
In certain situations like our special opportunities fund and our alternative credit on where we've actually seen accelerated.
On raising just given that those strategies or are particularly well suited for the current environment.
So as we sit here today, we're not actually seeing any change.
In terms of the pacing, obviously that could I could change as we get deeper into this ER as investors are dealing with things like denominator effect and.
Challenges of working remotely, but as of now we're not we're not forecasting that.
[noise] me maybe to follow that I mean, you've had been touched on it would kind of re ups being.
A focal point or you get a sense that.
There's a re upping I'd, maybe higher levels than you originally thought just given the.
The environment.
And your strategy.
Yeah, I mean I as we said we had eight funds that are in the market or soon to come to market.
Totaling over 25 billion that all can invest well into distress and so I think our investors have a pretty nice selection of strategies to choose from to try to take advantage of the current dislocation.
I think the re obviously we've talked about this on prior calls pre crisis. There was an overarching trend of larger managers, taking more wallet share.
I think that's accelerating now obviously, it's easier or a an LP to underwrite an existing manager. There were also some nuances where certain investors actually need face to face meetings by.
I regs and so.
I think if you're an existing manager with a good track record and a deep relationship that just a lot easier, particularly remotely to focus on a re up so we're actually seeing some of that getting reflected in larger commitments on re up which I think it's just a reflection of people Oh, yeah, maybe allocating more to some of the larger.
See managers and then the new funds.
Great. Thanks for taking my question.
Thanks, Rob.
Our next question will come from Ken Worthington with JP Morgan. Please go ahead.
Hi, Good morning are correct. Good afternoon, depending on where you are <unk>.
In the discussion of the three phases of investment opportunities you indicated less competition in phase three can you flush out those comments on the competitive landscapes.
And if landscape.
With regard to the banks.
You know to what extent and maybe where you were seeing banks as you know a bigger competitor on and how you think or what makes you think.
The pullback in the banks, a as competitors or you know will last year and to what extent if any are the government programs act, it actually accelerating or might accelerate the banks sort of return as as as competitors.
Thanks, Thanks for another one sure. Thanks. Thanks for the question again, so just to clarify the comment there wasn't really geared just towards competition from banks I think it was more a broader comment just about what the competitive set will look like on the back end of this.
And what we have seen in every cycle that we manage through as a consolidation of market share and market position coming through financial crises. So we would expect to see reduced competition and reduced liquidity in the hands of competitors across.
The entire competitive set a that would be consistent.
With our past experiences and consistent with what we're seeing in the market now with regard to the banks.
You know, obviously, we don't compete directly with them, but for in certain segments of our.
Direct lending business, particularly at the higher end of size range of potential borrowers.
Needless to say in this environment, while we're still active or the banks are not a active underwriting and syndicating leverage finance product.
I think as importantly, you saw this world through some corners of the market before the stimulus or it was put forward and that's actually still happening in certain segments of the market, where there are margin facilities are repo lines or or swap facilities. The banks have been moving to get liquid as I think most invest.
There's or.
And we have seen a reduced appetite to commit new capital across the board.
From the bank, so I I would characterize the bank behavior more as what we're seeing a in terms of them being liquidity providers into the market versus than being head to head competitors with us and so for the last 20 years I think people have been asking us about bank competition returning.
And the potential impact on our business. We we historically have not really compete head to head and I don't expect that to change.
Yeah with regard to the government programs <unk> saga.
No I was going to thank you for that but please continue.
I think the question was around government programs and whether that would catalyze increased competition from the banks and I think yeah just.
Similar comment is no I think the banks are obviously very busy.
Managing their existing exposures the same way that we and others are a and then obviously busy through policy mandate executing on on the government loan programs, but we don't expect their participation in those programs to somehow change their competitive positioning relative to us.
Okay. Thank you make sense and then end to end the deck or assets in incentive generating a lab.
Fell for obvious reasons, what's sort of returns do you need or on the credit side for those assets to fall back into that incentive generating a territory or is it you know could be a basis point could be 10% is there a a more narrow range that that.
We could see a lot of those assets return.
Back to incentive generating.
So.
On the assets that declining credit or fell out of incentive generating.
Most of that were.
Consisted of.
Pretty much separate accounts or more strategic separate accounts.
And that are for lack of their term earlier in their lifecycle. So these are all accounts or start deploying capital so while they fell below their property turned.
They're not far underneath them and they get after all start deploying capital into all European style waterfall, we don't think it changes the overall outlook for those we think it's a bit of a function, especially again when you think about IR, our math earlier days a funds at a little more volatile too.
You know cash activity in valuations.
Okay, Great I would say 10 is as <unk> as a general rule just in it. It's it depends on the strategy, it's probably somewhere between two and a half and 4% on the high end.
In terms of that build so to Mike's, but if you want to put a number behind it it's very very low single digit.
Great. Thank you for the color.
Our next question comes from Michael Carrier with Bank of America. Please go ahead.
Hey, this is deemed stepping on for my carrier or just in terms of portfolio companies and investments I can you just provide an update on maybe your energy exposure in other sectors, most impacted such as traveling leisure.
Maybe what you guys are doing to support these companies and any other areas of the portfolio you actually view as more defensive in this type of environment.
<unk>.
Sure.
You have to <unk>.
We kind of look at AIU m. across the entire platform as we talked about firm wide am it's kind of the best way that we can we can think about exposures and and are waiting in terms of retail.
Exposure is broadly about one and a half 1.7% of the firms that UN.
It is investing some some part of the retail landscape.
Travel and leisure.
Broadly speaking, which includes things like gaming and May includes an aerospace as probably didnt slated representational because they're not all directly impact it has about three and half percent of our a U M.
Ah an energy is in and around 3%, but of that only about 1% is actually in oil and gas exploration.
With the remainder being in renewable energy and midstream infrastructure.
So I'll leave it to you to decide how you want to differentiate between kind of the upstream and and midstream and but if you were to look at those exposures.
Relative to public indices, they're meaningful meaningfully underweight and when you look at those exposures are relative to any specifics funds or they are underway as well.
So as an example in our real estate business, we have no hotel exposure in any of our significant real estate funds. You know in fact, we've actually sold a big portfolio hotel investments over the last.
Team on so I think it's hard to to be completely and investing in knees and these parts of the market but.
We are underway and where we are invested it's pretty well distributed across the platform. So it's not impact any any single fund.
Okay, Great. That's that's helpful. And then just as a follow up given the active deployment in the quarter can you. Just you know touch on maybe in a little more detail areas of the market, where you're seeing the most attractive opportunities and then if and how those those opportunities are involving kind of given the recent market rally.
Sure.
We've got a bunch of or see Europeans on the line. So I am a mass them to provide a little bit of color but.
Going back to the framework of the different phases, we were obviously quite busy in the first phase in the liquid markets or before the stimulus came and provided a backdrop support.
So when you look at our deployment through March it was largely buying assets in the secondary markets as we're now transitioning a into phase two we pivoted into the private markets and as we said in the prepared remarks, the bulk of what we're doing there is providing rescue capital to companies that.
Need a liquidity bridge or want to buy quote unquote insurance.
To play off fence in this market similar to the way that we've thought about running around the company, but maybe just to give it a little bit of color I'll ask Scott.
Grades who runs our special ops business and then maybe Joe will.
An old credit just to get a little bit of a flavor for how they're playing x. I think it'll have to better understand where the opportunities are.
Sure. Thanks, Mike Hi, This is Scott graves, we look at the world on a relative value basis across Aries and compare what we can achieve in the public market.
Versus the opportunities available in the private market.
And to give a little bit of color to what Mike said, you know March traded down faster than any cycle.
What we've seen or invested in it traded down faster than a weight it traded down faster than a one it traded down.
Faster than the early nineties cycle. It was on pace with you know the great Depression of 19 that late late 19 twenties and beginning of the Thirtys that shop in the market presented terrific opportunities.
Significant opportunity to buy marketable securities what we thought were very attractive prices generally focused on the top of the capital structure.
Through the stimulus plans that came the week of March 20 Threerd.
And right around April 9th we have seen a bounce in the public markets.
And certainly with the view toward almost 2000 portfolio companies at Aries.
It feels like the opportunity set in the public markets has been muted and we are shifting to the private market.
What's different about this cycle is that this is going to be a liquidity driven cycle companies are seeing a significant shock to both their revenue line as well as their cost structure.
And they will need access to incremental forms of capital.
In order to get through and the strongest companies in the more attractive companies were focusing on will also find ways to put capital to work to play offense take share consolidate.
Make high returning return on invested capital based decisions.
And that's where we are focused.
Our backlog of private opportunities across the firm is as rich as it's ever been a and we really look forward to partnering with companies and management teams to provide them capital to get through this troubling time.
Two also strengthen their business as they think about how to improve our coming out of the backend.
Yes, Scott, it's Mike I think it's a good point, maybe just about the sourcing because we mentioned in the prepared remarks, but having an embedded portfolio of close to 2000 companies putting aside the number of marketable securities that we track puts us in unique position to offer these types of solutions either into the exists.
The portfolio or into companies that we had diligence before but not invested in so it does allow us to pivot very quickly into the private markets like like few people can.
Joel one where do you want to maybe Joe quickly.
On the alternative credit side, which I think is probably where we're seeing some be most acute liquidity shocks just a quick.
Quick overview of some of the things that we're focusing on there.
Sure. Thanks, Mike This is Joe Holsinger, Yeah, I think there ever with small windows, a cross alternative credit in the liquid markets and if you think of what we do an alternative credit. It's a lot of pools of loans receivable than underline leases and we do lend mean on the basic as well as rescue as well as.
What opportunities and then the liquid markets and what we're seeing similar to what Scott solid there was short windows, where there with opportunities to buy stuff in the secondary market on the liquids, but where we're seeing the biggest opportunity our lack of a better term semi illiquid opportunity there opportunity there created by the liquidity shock from mark to market and leap.
Oh financing, where with the downdraft three or four weeks ago. It created a lot of longer lasting pain across both other credit type funds as well as some of the mortgage riet you've seen in the news.
And so we've been very active in those opportunities and what you'll see is that the opportunities. We're seeing there are large so there's a shortlist of people that they can go to to be able to solve some of their issues and we just closed on the deal a couple of weeks ago that was $350 million.
Others that was effectively taking out a mark to market repo financing, where they had it band at a much higher advance rate Im a very low cost to capital to 3% cost to capital just dumping from our standpoint, where we brought them a private solution and were 15% to 20% type I error ours.
But on a more term permanent type basis, and I think it's reflective of the opportunities that where you have to have the ability in the power the platform to be able to do size and bring a solution to the table. So they're still too rapidly source and bilateral type transactions, but a lot of it in.
I mean out of the pain, that's occurring from the Swiss downturn of the liquidity of liquid markets.
Thanks, John Dean probably more maybe more color than you bargained for but I always think it it helps bring the opportunity to life. So think.
Thanks, guys.
Yes.
Our next call every question will come from Craig Siegenthaler with Credit Suisse. Please go ahead.
Thanks for taking my question Hope you all doing well and for your two parter on fee related earnings.
First the seal of subordinated fees can you explain how they are calculated and what could sugar area to defer these fees like we saw from Carlyle in the first quarter and the second part can you remind us how air C C or BDC calculates it's incentive fees part one and what could cause these fees to be deferred too. Thanks.
Yeah.
Sure.
I'll start first part of that Craig hope you're well.
On the feel of the sub fees. If you think about a seal a waterfall you have where theres two feet components on the recurring management fees. There is a senior fee, which literally set top and it's actually senior to the AAA bonds and then you have a subordinate fee, which depending on the deal.
As somewhere closer to the bottom.
Our deal.
Our structured Sim more but a little different a little more conservative than others in the market in so much as our blended fee.
At approximately 50 50.
Between.
Senior fees and the sub fees and CLS, so higher percentage of our steel a management fees comes from the senior fees. Then you usually expect used to seeing.
And second our sub fees for I'd say.
Almost three quarters of our deal.
Our usually senior to at least one of the Yossi tasks on interest aversion test.
As far as what it means from an FSRU perspective, maybe just kind of departmental twice the size of a to us.
COO sub fees again rockers that about half our fees from close that amount was I think about three just maybe just over 3% this quarter a cost 3.3%.
So to a route just over $9 million us when we think about diversion risk as we ended the quarter all of our COO as we're passing all they're always see tests.
I guess I'm not we don't want to comment on other managers I think feel those are different as far as structure to some extent and how they manage our different some CLL as our managed.
We are we to rating and picking the highest return points within a rating spectrums.
Whereas we similar to everything else, we do it Aries have a very fundamental credit focused approach to the portfolio. So close.
I think that enables them to be more conservatively positioned.
But if I were to think about kind of a draconian scenario, where if something close where to start failing see tests.
Based on what we saw the financial crisis, and how you stressed that I think you can see maybe.
Got it kind of more of a dire scenario say up to half the deal failing for one to two quarters, which for us you'd think about.
As being one I think thats.
Probably worse than you saw during the great financial crisis of all eight or nine but.
For us would be an impact on management fees. That's you know for all practical purposes de Minimis. So I feel pretty good again about the CLL Buck most notably because of the split and just the overall side of it the last seen probably to highlight this is a little different that's on the commentary you just heard is when you compare so close.
To the last time around on the last great financial crisis.
Back of than about 50% of the syndicated loans going into what were owned by Filos about the other half were owned by other parties at a lot of what was heavily owned on swap. This time around about three quarters of syndicated loans are held by close to your off last will recall for selling so I think the downward pressure on.
Prices, even if downgrades continue.
The bottom probably won't be as steep as or was that time around.
Okay.
On a a RCC.
The admin.
Craig on the part one for you I think that's what you're referring to.
And I apologize remind me of what you were trying to find out but I I can take it Mike I think it was just about the the structure of the RCC part one fee and.
The deferral mechanism and I think it's important to to be separate the two.
Because there are two separate calculations around earning and deferring and I think it's important that we differentiate between.
See getting earned in the C getting paid so.
The way that the part one fee works, it's calculated quarterly against a 7% hurdle pre incentive fee and then we compare that to.
To the extent that it's above the 70% hurdle for the quarter, we get a 20% part one incentive fee. So by wave referenced this quarter it was about 9% against the 7%.
There is also a kind of it nuanced deferral mechanism, which frankly, we inherited a when when the the BDC went public in 2004 that is designed I think two theoretically protect liquidity or in that.
In that portfolio to the extent that you are seeing credit deterioration in income deterioration and basically what it does as to the extent that it is earned it then looks at your.
Your return of payments to shareholders and NAV.
As to whether or not to pay it.
And so there could be situations and we saw this in 2009, where even though the book is performing and paying cash interest and therefore able to support the payment of being sent to see independent of the dividend it traps to see.
But the fees earned and then gets paid out a at a later date, what's unique about the calculation is it's a four quarter look back and then it resets on the new and Avi. So basically what happened if you were to track that fee. It would likely pay out you know starting at.
A year later.
When you were in that new that new NAV hurdle.
So if you look at our history.
The part one incentive fee has been earned every quarter.
Since a RCC went went public.
And then the deferral mechanism, obviously, it's just a function of unrealized losses, which either come back or resets are now than men at pace. So I don't know if that was too complicated or not Craig but its.
It's a little bit of a nuanced.
Okay now that was properly.
No and I just didn't just to come just just to reiterate <unk> Craig sorry, I think you saw I actually see announced earnings yesterday, and obviously, we're not in a deferral situation.
Sorry, operator.
No we're not a problem now our next question will come from Gerry O'hara with Jefferies. Please go ahead.
Okay. Thanks for taking my questions. This morning, I'm actually similar question just a follow up I think to Ken's question earlier with respect to 'em incentive generation acquired for Oh, you ability I think he is question was credit I'm not sure. If the private equity side was was touched on but perhaps if you could comment on that.
Helpful.
Sure the Fung thought I think fell out of incentive generating this quarter.
Were there was only three of what I would car flagship funds across all of our businesses.
Two in private equity one in real estate.
And all three of those funds our funds still in their investment periods.
They fell below the preferably terms, but again, where they were in their life cycle.
They weren't five hour to call and Carrie harvesting mode, and if you look at where our crude Kerry.
Was that your end it is today.
It's mostly concentrated or funds are still generating and pass their investment periods with most of those being and both private equity and real estate.
Jerry I think I want to reiterate what Mike.
Talked about in the prepared remarks, just for a second which is obviously.
Incentive related earnings are an important part of our business model and but it's not the predominant part of our business model.
And as we've talked about on on prior calls we switch to capital.
Management plan, where we were paying our dividend to our fr re and using our performance related earnings to.
Effectively retain earnings compounded the low tax rate and invest back into the earn the core earnings engine and so I think it's important to contextualize those types of moves against the framework of how we manage the depending on the balance sheet and so where you to look at the net accrued carry.
While we were not immune to the down graph, we basically so I'd go from 340 million to 235 million or what that's not accounting for is the waves of new funds.
That sit behind it that we'll obviously replenish and continue to grow that so I think it's it's worth paying attention to it but I just want to remind everybody that it's not actually a significant driver.
Of the profit picture at areas or or doesn't factor into the supported the dividend.
Okay.
Help her reminder, and this is perhaps a a broader question, but you know areas managed its business very well through the through the financial crisis.
Are there any you know there sort of one or two.
I guess lessons if you will from that time period, or perhaps actually better stated changes that were made to that the investment process that have really shown through are shown to be advantageous advantageous as we've kind of moved into and wherever we are on stage of this this current crisis.
[laughter].
I'll say couple of things that we talked about it in the prepared remarks, but you know each crisis is different but the crisis response tends to be.
Similar if not familiar and I think the good news is this senior management team has been together a long time and navigated all all the crises and so there's a lot of institutional muscle memory and a lot of learning.
I think what's unique about this one is it is very heavily it's it's a liquidity.
Driven crisis, and so I think now more than ever we are focused on liquidity, whether that's liquidity at aries liquidity within our funds and liquidity when the portfolio companies and I think people who.
Mismanaged their liquidity position going into this are feeling the pain and those that are not taking the liquidity shortfalls seriously enough in allowing for an extended period.
Period of dislocation I think you're also going to suffer so maybe differently here were being a little bit more judicious a in terms of how we're thinking about liquidity in how we're how we're investing.
And then I think the big lesson learned AIDS you can never timed the bottom I'm. So you have to be investing through the crisis and that's why these phases, even though there are uncertain in terms of how long, they're gonna be on whether or not we get to test. The lows that we saw in March in in the future is unclear, but you.
I have to be investing all along the way to make sure that you're capturing capturing the opportunity. So I think what you'll see from US which is what you're seeing from US before is we're going to be measured in our deployment at each of these spaces and obviously, how we access the market is going to change depending on the pace that were in but.
Uh huh.
We're also a much larger.
Broader I'm much more diversified company than we were 12 years ago, and I think that that serves us well, we just have more data points more information more talented people more access to capital and so we did very well.
No nine and subsequent years, but when you look at where we're positioned now.
What are on your position relative to where we were then we're obviously just at a much much better place.
Great. Thanks for taking my questions have been.
Thank you.
Now our next question will come from Chris Harris with Wells Fargo. Please go ahead.
Yeah. Thanks, so piling on to that that last question there.
One of the things that seems a bit different and this recession is the yeah. The severe impact on small and midsize businesses first maybe the larger ones that have perhaps more access the capital.
<unk> areas as core focus being the middle market, that's creating a really good investment opportunities for you, but at the same time, you know could present some some elevated risks so how should we be thinking about the rest of being in middle market investor and lender in this environment.
Yeah, I'll give you my two cents men kit or others. If you if you want to pile on feel free but we've been trying over the last couple of years to help people understand the value of B senior secured lender at the top of the balance sheet in a control position.
Versus the risks of being an equity.
Order below.
So we would agree you know one of the challenges today is a lot of the money that has found its way at least into the the killing of the markets is going to companies that frankly don't need it and the small business and consumer probably still.
Liquidity challenged and and feeling that the strain I, but if you look at our middle market lending books. They are predominantly senior secured.
They are predominantly in situations, where we are the control lender. They are predominantly in situations, where there's a large well capitalized institutional equity owner below us.
And maybe echoing what I just talked about in terms of how we're positioned the size and quality of the companies that were lending to and our private credit books is just much different than it was 12 years ago in terms of the institutional quality and franchise nature of those businesses. So as Kip and the team talked about on a RCC his call and you can see it in the credit.
Metrics, there was obviously a modest pick up.
But we had almost 100% I think it was 100% payment or close to it.
The quarter slight tick up and non accruals and I think that's a function of the quality of the underlying book.
But also the fact that there.
We're facing off against institutional equity owners, which is in of itself at risk Mitigant.
So as long as you're going into it liquid and as long as you have to capability to actually.
Own a company to the extent that you need to foreclose on it through the.
Through the senior loan I actually think there's money to be made and when all of sudden done. This will wind up having been yeah, an equity issue more than it is a credit issue at least for you know.
For a well underwritten book like like I think we here.
Our next question will come from Health Blas Stein with Goldman Sachs. Please go ahead.
Great Hi, I'm. Thanks for taking the question. Thanks for all the color as well I wanted to ask you guys around some of the strategic M&A priorities I think Mike both mikes actually I think highlighted that in your prepared remarks.
With respect to flexibility on the balance sheet, and obviously you know that historically more acquisitive nature of some of the growth initiatives you guys put into place so.
Anything in particular comes to mind, either in some of the more dislocated areas.
For kind of corporate M&A or accelerating some of the initiatives that you've been trying to build whether it's real estate or other things Tom some color there would be helpful. Thanks.
Sure out so we've been pretty explicit on prior calls as to where we're focusing and obviously they were insurance.
Asia, and real assets, and obviously, you're seeing us execute well against that strategic framework within SSG, the SMBC tie up and and the continued development of the speed a platform. So.
Obviously, we'll continue to use our balance sheet to advance those those initiatives.
Real estate infrastructure in real assets broadly defined continues to be a big focus for us. It is becoming a bigger focus is telling you something that you probably know a real estate is yeah, theres, just a significant amount of distress and transformational change happening in the.
Real estate markets as a result of the.
The health and economic crisis, and so we would expect through M&A and new product development to be able to actually accelerate the growth of our real estate business organically and inorganically coming out of this crisis and so it's always been a priority, but I actually think it's probably moved up the list.
A little bit just given the size of the opportunity set everything I would highlight we've talked about this a lot of what we use the balance sheet for is not just strategic M&A, but strategic product development and joint ventures, and so in a market like this using the balance sheet too.
Acquire assets and teams and then reposition those assets and teams into new business lines is something that we have a lot of experience doing.
And we're already having some pretty interesting conversations on some new product development, where we can modestly use the balance sheet to launch a new product that sits adjacent to something that we already doing so I would expect that we'll be doing a fair amount of that over the next couple of quarters as well.
Great. Thanks, so much.
Our next question will come from Kenneth Lee with RBC capital markets. Please go ahead.
Hi, Thanks for taking my question I'm, just wondering if you could help us frame the relative strength for the liquidity position of affirm talk about any liquidity needs or perhaps any kind of unfunded commitments in a in the near term. Thanks.
Sure Michael I take that one.
Sure happy to.
I think we talked about in our prepared remarks.
Clearly the balance sheets flush with cash.
That combined with Undrawn access on our revolver.
You know billion for plus the liquidity so feel great about our liquidity position, we have no mark to market leverage, which I highlighted which is important because there's no exposed flanks, where we have to worry about funding margin calls are similar types of.
Repayments Thunder.
No near term debt maturities, you probably would have seen.
We amended each year, we usually roll our revolver as our corporate credit facility is now 2025.
So I think from up and from a full balance sheet standpoint, three years out from our next bond maturity and have a lot of capital. So I think we feel really really good about that as far as commitments, we do have GP commitments to our bonds.
We are fairly decent amount of those are held by our employees.
That invest side by side with Aries management and our funds.
We probably have to settle the closing of.
Yes, G, which we had previously the scope.
Close was primarily stock and up of a speed is close to that transaction or propone ever. We had previously described the amounts.
Outside of that there was no other real what I would call contractual all liquidity requirement, it's going to be really more about you have access to our.
Yeah.
A lot of capital for opportunities.
Yes, just to frame that.
I can't I actually think if you looked at to Mikes point the balance sheet light model is actually got lighter over time is the ways, you're taking up more and more GP commitments, but if you aggregated.
Future funding potential in our existing investment book I think it's about $400 million, which obviously doesn't get get deployed.
Quickly over the next many spread across five funds yeah. So if you're trying to think about the demands on the balance sheet from the actual book of GP investments, it's actually quite small.
Great very helpful. That's all I have thank you very much and hope everyone stay safe.
Thank you as well.
And our final question will come from Michael Cypress with Morgan Stanley. Please go ahead.
Hey, Thanks for squeezing me in here just a question on the direct lending opportunities that just hoping you could elaborate a little bit more there indirect lending, which has been largely sponsor finance I think for you guys. Like 80 20, I'm. Just you know how your direct lending funds are of adapting against an evolving opportunity set that's not seeing as much elbow activity.
How much of the deployment would you say, it's focused on existing portfolio companies versus making newer investment. So maybe you could talk about how you're sourcing some of this new where investments.
Sure so.
You're right Newbuild activity is somewhat muted although it is it is happening so we're closing new transactions in in both Europe, and the U.S., particularly in industries.
You know that are obviously not affected by.
By Kobin. So there is a segment of the economy that can be underwritten around technology and certain segments of the healthcare landscape et cetera. So there is stuff to do there, but it is at a slower.
There is an opportunity as we mentioned I think it will accelerate to provide capital into our existing books I thought it was interesting on the RCC call yesterday, Mitch talked about capital deployment into the existing a portfolio that has got 14.7%.
Return against an 8% return on on loans they came out of the book.
That was a pretty good indicator of the type of return opportunity that we're seeing bringing capital into into that portfolio.
And about 50% of the deployment in the quarter I think went to existing borrowers so where the direct lending teams are spending most of their time is re underwriting the existing book using their capital to invest.
To support those companies, but where they're making investments tightening up documents.
Deleveraging through equity infusion below us increasing spreads fees and all that said, there's a there's a re underwriting but then there's also can have a re rating of the book, which you should see a come through in higher returns on the embedded the embedded loans second thing were doing is a in partnership with me.
The alternative credit group and the opportunities funds is leveraging that combined platform on the rescue lending side and that's been very very fruitful.
There's opportunity for us to provide liquidity into.
Certain companies that have incremental baskets that allow them to actually bring new capital into companies without reopening bops, that's been pretty fruitful for us so.
Yes, it's actually been quite active and then needless to say all of our direct lending funds have the ability to actively investing the secondary market as well and as you would expect there is a very long list of.
Of names that we are tracking actively as potential secondary opportunities.
We would expect that as this volatility extends that as we've done in the past, we'll start seeing portfolios and single assets actually coming.
Coming back to us as a secondary opportunity as well.
Mike I'll just jump in its kipp Deveer I'll, just say I think is this extended to the key point, we're going to emerge much stronger I mean, we definitely see competition in the space.
Significantly weakened for the most part we see a lot of competition, that's having difficulty.
Dealing with outstanding commitments.
Providing liquidity to existing portfolio companies and when the concept of a new deal.
Comes for it.
It's kind of a nonstarter.
We're in exactly the opposite position and that we've deployed in the U.S. in Europe North of 2 billion since March 1st in a lot of the opportunity set that Mike outlined so we're very much in business for new deals. Although there are fewer them and there are a lot of other things to do in the current environment that are pretty exciting.
Great. Thank you.
Ladies and gentlemen, ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's Colm and archive replay of this conference call will be available through June 12, Twentytwenty by dialing 87734 for 75 to nine.
And to international callers by dialing one for one to 317 008 for all replays. Please reference conference number 101, or 0271 and archive replay will also be available on a webcast link located on the home page of the Investor Relations.
Section of our website.
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