Q3 2020 Ares Management Corp Earnings Call
Welcome to Aries Management Corporation third quarter earnings Conference call.
At this time all participants are in a listen only mode.
As a reminder, this conference call is being recorded.
Today Wednesday October 20 2020.
I will now turn the call over to Carl Drake head of public company Investor Relations.
[music].
Thank you let me start with some important reminders comments made during the course of this conference call and webcast as well as accompanying documents.
Forward looking statements are subject to risks and uncertainties.
You can get back to covert.
Related changes in base rates and significant market volatility our business and our portfolio companies.
Many of these forward looking statements can be identified by the use of words, such as anticipates believes expects intends will should make some more subjects.
The companys actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its actually see.
Aeris Capital Corporation.
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[music].
Welcome to Aries Management Corporation's third quarter earnings conference call at.
At this time all participants are in a listen only mode.
As a reminder, this conference call is being recorded on Wednesday October 28.
20.
I will now turn the call over to Carl Drake head of public company Investor Relations for Aries management. Please go ahead.
Good afternoon, and thank you for joining us today for our third quarter 2020 conference call I'm joined today by Michael Irrigating, Our Chief Executive Officer, and Michael Mcferran, Our Chief operating Officer, and Chief Financial Officer.
In addition, we have a number of executives available for the question and answer session. Today, clearly Bennett Rosenthal co chairman of our private equity group.
Kipp Deveer head of our credit group still Benjamin had a real estate group and that sort of that so we have a private equity group.
Before we begin I want remind you that comments made during this call contain forward looking statements that are subject to risks and uncertainties, including those identified in our risk factors would that are actually see filings.
Our actual results could differ materially and we undertake no obligation to update any such forward looking statements.
Please note that past performance is not a guarantee of future results.
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.
Measures prepared in accordance with generally accepted accounting principles.
In addition note that our management fees include Air Sea part one Kings Lane.
Please refer to our third quarter earnings presentation available on the Investor resources section of our website.
Reconciliations of the measures to the most directly comparable GAAP measures.
Nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any area.
Sportingly NASA, we declared our fourth quarter common dividend of 40 cents per share.
Representing an increase of 25% of our dividend for the same quarter last year.
The dividend will be paid on December 31st 2020 to holders of record on December 17th 2020.
We also declared a quarterly preferred dividend at 43.75 cents per series J preferred shares.
Which is payable on December 31st 2020 to holders of record on December 15th 2020.
Now I'll turn the call over to Mike were getting ill start with some quarterly financial and business highlights.
Great. Thanks, Carl and good afternoon, everyone I hope, you're all healthy and I wish you well.
Despite the broad effects of the Kobin crisis, we continued to execute well across all of our core functional areas with record setting third quarter results.
Our third quarter saw a year over year growth of 24% and our assets under management driven by a record quarter fund raising 23% growth in our fee related earnings and nearly 50% growth in our realized income as we monetize some investments in a strengthening equity market.
We also continued to see the benefits of scale as we reported our highest FRB margin since our IPO.
I'm also pleased to say that our fund performance was generally strong against the backdrop of an improving economy and favorable technicals in the liquid markets.
Going forward, we continue to believe that our business is well positioned to grow fee related earnings by at least 15% per year in the years ahead.
During the third quarter, our deployment was a little more measured compared to previous periods as market transaction activity was slower and in transition.
During the third quarter, we invested 3.9 billion from our drawdown funds versus 4.7 billion in the second quarter with a continued focus on providing scaled flexible solutions to private companies, particularly in our global direct lending special opportunities and alternative credit strategies.
We are starting to see a significant pick up in M&A transaction activity in both North America, and Europe, which we expect will create a healthy backdrop for both deployment and monetization.
We're also seeing some interesting opportunities for undervalued assets in certain sectors within the public markets, such as real estate, where there's been considerable volatility.
For example, we recently made a convertible preferred investment and dessert based publicly traded residential property owner with attractive German assets.
We believe significant underlying value exists and the stable asset class in a core European market.
Also just last week, we announced that we're partnering with a specialized asset manager and the take private or public single family rental company, where we see an opportunity for value creation.
This last deal is a perfect example of how we're collaborating more actively across our platform and leveraging our scale our deal flow and unique market information to navigate the current environment.
In this specific situation funds managed by both our real estate equity and alternative credit strategies collaborated to bring a flexible and scaled solution to this company.
This was a natural fit for our real estate strategy, given our leadership his experience in the asset class and it also fit well with our alternative credit strategy, which looks for diversified pools of assets with strong contractual cash flow.
As another example, our special opportunity strategy recently partnered with our direct lending team to commit to a first lien rescue capital facility to a global leader in the transportation industry.
Now turning to fund raising.
The case for investing alternatives continues to be very compelling.
Investors remain frustrated with low interest rates and the dual challenges of high valuations and volatility in the traded markets.
In addition, the long term trend of Investor is consolidating their relationships amongst fewer trusted managers with a broad product offering is ongoing.
We continue to expand our wallet share with our clients and we believe that we have a long runway for growth as they increased both are alternatives allocations and their LP fund commitments across our platform.
We continue to see evidence of this in the attractive re ups into existing strategies, coupled with a desire to commit new capital across multiple other every strategies.
The third quarter was our largest fund raising quarter ever with $12.7 billion organic gross capital raised which puts us at more than 28 billion for the first nine months.
Year to date, we've raised capital directly from over 250, institutional investors, including approximately 150 existing areas investors and 100, new to our platform.
The existing investors accounted for 81% of the capital raised which we believe is a testament to our consistent and strong performance and the deep relationships that we've built with our investors over the last 20 plus years.
Specific to our third quarter fund raising approximately 8.2 billion or more than 7 billion euros was raised from the initial closings for our fifth flagship European direct lending fund that was launched just five months ago in may.
We're already nearly 10% above our previous fund size and we're well on our way to hitting our target for LP commitments of 9 billion euros.
Once finished we expect that this will be the largest ever European direct lending fund, which reflects our market leadership in this attractive and growing segment.
To date 89 investors have committed including 65 existing investors and 24, new investors and of note eight investors committed 250 million euros or more to the fund.
During the third quarter. We also continued to make progress with additional fund closings totaling approximately 3 billion across our other credit strategies, including alternative credit liquid credit and U.S. direct lending.
Oh, no post quarter end, our alternative credit flagship fund reached its original target of $2 billion, given the considerable investor momentum and strong investment pipeline, we're planning for additional closings in the coming months before concluding the fund raise.
Our alternative credit strategy has increased its you went by more than 50% in the last six quarters and remains a significant future growth opportunity for us.
Our six flagship corporate PE fund has closed on commitments of $3.7 billion to date we.
We expect to hold another closing by year end and plan to hold the final closing in the first half of 2021.
We've initiated toehold investment in the fund.
As we sit here today, we have a strong pipeline of both traditional and distressed opportunities.
We also had initial closings of 235 million in our climate infrastructure fund that focuses on the energy market transition.
And additional inflows Aries SSG senior secured direct lending fund, which is now approaching $1 billion and commitments.
Our fund raising momentum is continuing into the fourth quarter with a significant forward pipeline.
If folks recall, we shared on our last quarterly call that we were focused on surpassing $30 billion in gross fund raising commitments for the year.
Based on incremental closings in October we've already achieved that goal and we believe that there's an opportunity to meet or exceed our record fund raising year of 36 billion that we saw in 2018.
Looking forward. We currently have over a dozen commingled fund raises that either are in the market or expected to be launched in the next 12 months and collectively these funds are targeting equity capital commitments of more than $25 billion incremental to the amounts that we had close through the end of the third quarter.
[noise] [noise] outside of these commingled funds our fundraising efforts will certainly continue with our managed accounts and strategic partnerships public funds. Other commingled funds, new funds and various closed end vehicles, all of which traditionally accounted for a significant amount of our annual capital raised.
We saw positive fund performance gains across our significant funds in Q3. The performance was led by strong returns and our corporate private equity and special opportunity strategies, which generated quarterly gross returns between 6% and 9%.
Our European direct lending and liquid credit composites also generated gross returns ranging between 2.7% and 4.5%.
Our U.S. flagship direct lending fund Aeris Capital Corporation continued to see improved performance with a third quarter net return of 6.5%.
Our real estate equity composites also generated positive quarterly returns ranging from approximately 2% to 6%.
From a monetization perspective during the third quarter, we took advantage of the strengthening equity markets and we generated realized income from the final sale of our Florida core position in a copthree.
In addition, we sold a minority position in a cost four portfolio company, the AIDS that company, which completed an IPO earlier in the year.
We're so happy to see both companies prospering in the public markets.
And as the private market backdrop is now improving and equity markets continued to be strong we will continue to be opportunistic on the monetization front.
Lastly, before I turn the call over to Mike I want to provide a brief update on our insurance initiatives through our Aries insurance solutions platform.
Last month, we announced that our subsidiary speed is acquiring the reinsurance subsidiary of FCL holdings and that it entered into a strategic partnership with FCL holdings for a flow reinsurance agreement.
Once closed we believe this platform will accelerate our plans to grow speed to both organically through additional reinsurance transactions and through possible acquisitions.
Our growth plans remain the same and we continue to expect to support this aerie sponsored insurance and annuity platform largely with third party capital.
Of note, we continue to enhance our leadership team with an Aries insurance solutions as we just added Raj Christian on the former CIO of F and G. As our CIO for Aries insurance solutions.
And now I'll turn the call over to Mike Mcferran for his remarks on our business positioning and financial results Mike.
Great. Thanks, Mike and Hello, everyone I hope all of you are safe and well.
I'd like to begin with some high level comments on the quarter before turning the more detailed review of our results and financial position.
The third quarter marks our 14th consecutive quarter of Fr Ecoworld, which highlights the strong growth trajectory of our overall business and the benefits that we are deriving from greater scale.
As Mike highlighted this quarter represents several new financial milestones for the business with our largest ever quarter of capital raising our largest single first close of a fund with our fifth flagship European direct lending fund.
Quarterly fiery an excess of 100 million record AOL fee paying AUM drypowder at AIU I'm not yet earning fees. In addition, we closed our acquisition of SSG capital at the beginning of the third quarter, adding approximately 6.9 billion and AOL and 4.3 billion and fee paying.
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In connection with this acquisition, we are reporting Aries SSG within strategic initiatives, along with other strategic ventures that will include a speedo upon the close enough its F and G re acquisition.
With that I'll go through the details of the quarter.
Fee related earnings for the quarter totaled 106.8 million, an increase of 23% from the third quarter of 2019.
Year to date, our F. Ari of 297 million was up 26% compared to the same period last year. This.
This growth despite the economic fallout from COVID-19 illustrates the resilience of our business and the trust our investors have in us.
Our continued frdp growth demonstrates the durability and consistency of our management fee driven business model.
Our results for the quarter, reflecting that party margin of 35%.
From 33% a year ago, and we expect to continue to deliver further margin expansion.
Based upon the timing of deployment and market conditions. We believe that we can grow margins by a 150 to 300 basis points per year and target achieving a run rate 40% margin within three years, if not sooner.
[noise] with 12.7 billion of gross fund raised in the quarter, our AUM and fee paying AUM reached new highs, increasing 24% and 21% respectively over the last 12 months.
This fund raising drove our shadow AUM to a record high of 39.3 billion for the quarter, an increase of nearly 50% year over year.
Our management fees totaled 300.1 million for the quarter, which represents a 15% increase over the prior year.
A comparison total expenses consisted of compensation Gionee were 198.2 million, representing an 11% increase over the prior year.
We always income for the quarter totaled 146.4 million, which represents an increase of nearly 50 million or 49% as compared to the third quarter of 2019.
Our private equity group recognized over $1 billion in realizations in the third quarter, driven mainly from sales in floor into core and the A's that company, which contributes to our year over year increase in realized income.
After tax realized income per share of class a common stock net of preferred stock distributions was 48 cents for the third quarter, an increase of 41% from the third quarter of 2019.
Next I'll turn to our AOL and related metrics as of September Thirtyth. Our aid you Wanna totaled 179.2 billion compared to 158.4 billion for the second quarter, a quarterly increase of 13%.
All right or am growth was largely driven by gross new capital commitments of 12.7 billion. So.
Significant market appreciation of over 4 billion.
6.9 billion from the assets GE capital acquisition Yeah.
Year over year, our AOL has grown 24%.
Our fee paying AUM increased 21% year over year, driven by meaningful deployments, our global direct lending special opportunities that alternative credit strategies.
We ended the third quarter with 112.7 billion, a fee paying AUM, which sit breaks down approximately 72% credit funds, 16% private equity funds, 8% real estate funds and 4% strategic initiatives funds.
Our available capital increase to new record high of 52.5 billion, an increase of over 55% year over year.
We ended the quarter with 39.3 billion of AIU I'm, not yet paying fees of which approximately 36.3 billion as available for future deployment and have deployed corresponds to annual management fees totaling 386 million.
With our significant available capital and dry powder, we remain very optimistic on the potential growth prospects ahead of us last our incentive eligible AUM increased by more than 19 billion to 105.6 billion and of this amount 41.5 billion was uninvested at quarter end.
The third quarter saw continued appreciation of our net accrued performance income balance, which now sits at 322.5 million.
This represents a 12% increase from the second quarter and 37% increase from the lows at the end of the first quarter earlier this year.
With record levels of incentive eligible AUM, including more than 40 billion. That's uninvested along with our net accrued performance income. We believe we have the building blocks in place to generate and recognize meaningful long term value through additional performance fees over time.
Our next like to take a moment to address our robust financial position and capital structure, especially since the beginning of the year.
Last quarter, we took advantage of the low interest rate environment by issuing $400 million and Tempur. Then see me in 10 year notes at a 3.25% rate, which further increase our flexibility and strength in this market cycle.
We ended the quarter with nearly 2 billion in liquidity with 869 million in cash on the balance sheet and no amounts drawn on our 1.065 billion corporate revolving credit facility and.
Importantly.
We have no maturities until 2024, and we have cash in excess of all of our outstanding debt of 226 million.
As we previously announced our outstanding $300 million of 7% perpetual preferred stock as callable as of June 2021, and has this date gets closer we will reevaluate, calling and retiring this equity as is comparatively expensive, especially compared to our newly issued interest deductible debt.
The substantial liquidity and a strong balance sheet, we are in a compelling position to be more aggressive if and when we see fit going into the final quarter of 2020 and beyond.
This gives us the option to further scale our strategic areas.
With continued possible market volatility and the election related uncertainty, we remain very well positioned in capitalized to take advantage of any strategic opportunities that may arise now going to turn it back to Mike for concluding remarks.
Thanks, Mike.
We have long said that areas is one of those unique and differentiated kind of put all weather businesses. It's a business that can perform in various market environments and has outperformed.
In difficult markets.
Our business isn't just demonstrating great durability and resilience in the current market backdrop, but we're also experiencing strong forward momentum this.
This is most evident from our record financial results and our capital raising success.
Our cycle tested approach the breadth of our capabilities and our competitive advantages are all serving us well during these challenging markets and we see this in our fund level performance and differentiated deal flow we originate.
I think our capital raising underscores the diversification of our business.
We're able to not only grow and scale, our comparatively mature businesses like p. indirect lending.
Well, we can now leverage our strengths to scale some of our comparatively more recent businesses like special opportunities and alternative credit.
Lastly, our ability to execute on new strategic initiatives organic and inorganic is a solid reminder, that were consolidator in a growing market and then we have multiple avenues for continued long term growth.
As Mike mentioned, we're fortunate to be well capitalized to execute on these exciting growth opportunities.
With all that said I want to conclude by expressing just how impressed and proud I am of the grid and the hard work and the dedication that our team has demonstrated again, how grateful I am for all that they're doing.
To deliver for all of our stakeholders in these challenging times we.
We also do be appreciate all of our investors continuing support for our company and we thank all of you for your time today.
And with that operator, I think we're ready to open up the line for questions.
Thank you.
I'd like to apologize for the issues, we encountered at the beginning of today's call.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Robert Lee with KBW. Please go ahead.
Great. Thanks, Good afternoon, everyone and thanks for taking my question so over time as well.
The no Mike and just kind of curious no mean.
I mean, we were hearing that you know not just when you look at some of your peers you know that.
Deployment.
It's getting better and really your best performance has been good but what do you see more broadly.
Hey, Good universe, I mean are you seeing signs maybe shouldnt be inclined to think maybe some had triggers are starting to fall away because they they were caught slot more slots we did buy.
Hi, what's happening and what kind of its case, what kind of operating.
Opportunities are not exact creating whether it's on claim in acquisition or greater.
Ready to capture the Lps.
Sure there's a lot in there so I'll try to.
<unk> hit most of it and then if you have a follow up we can we can drill down anytime we go through a crisis of the depth and magnitude like the one that we're going through now.
We always see market share consolidation and as we've talked about in past quarters. There is an overarching secular trend in alternatives for the larger platforms getting larger.
And we have long believed that unlike an illiquid markets where size can sometimes hurt performance.
In alternatives at least based on the way that we go about the business. We have found that the larger we get.
The more we can invest in competitive advantages and the better our performances. So I think this crisis is no different.
In that respect than in past crises.
And how we consolidate that share takes many forms so to your point we deploy.
Because we have scaled capital and flexible capital to pivot.
As the market develops and so you'll see that in our deployment in the first nine months of the year, we were much more active in the liquid markets through the first four or five months of the year pivoted actively into the private markets across the platform through the middle of the year on rescue loans and now are pivoting yet again.
Into the regular way buyout market as the economy starts to heal and capital comes off the sidelines. So I think in order to succeed through the cycle. The way that we have you have to be able to play each and every opportunity that gets put in front of you and you have to have the cap on the people to execute well.
So yes, those that went into the the crisis with weaker portfolios.
Weaker balance sheets are less capability I think are experiencing this.
Prices much differently than we in some of our larger peers are I also think that that's showing up in the fund raising.
We hear anecdotally that the smaller single asset managers are actually having a very challenging time raising capital on the work from home environment.
Juxtapose that with us and the larger peers, who I think are all enjoying very significant success across multiple products.
And then lastly, I think you know with regard to deployment picking up we've often talked with all of you about the three phases of the cycle, one being that first phase where were.
The liquid markets were not functioning.
And we were active.
Playing liquid distress, the second phase being kind of where we are now which is largely.
Largely rescue capital opportunities and taking advantage of people's need for liquidity or in both what I would call high quality assets with bad balance sheets or high quality balance sheets and decent.
Decent quality asset pools, and that's been a lot of what we've been doing.
Through the middle of the year and as I mentioned in the prepared remarks the.
The deployment was probably slower in Q3, just as a result at the markets, where normalizing and now as we head into the ended the year I think the combination of people coming off the sidelines or with a lot of pent up demand for deployment.
Some prospects for economic recovery, albeit uneven some tax driven selling on the part of asset owners and I think a view that low rates are going to support asset prices for a longer time, we are seeing very very significant pickup in deployment across the platform.
And when we get into that phase of the cycle as we've talked about that's kind of the sweet spot because you still have people who are poorly capitalized. So the distressed opportunity does not go away, but you now have the opportunity to pick and choose between regular way flow for noncovered impacted assets and companies relative to.
Yeah, the workover impacted so we're pretty optimistic about deployment and monetization going into the end of year and into early into 2021.
Great. Thanks, Mike appreciate it thanks.
Thanks, Rob.
Our next question comes from Gerry O'hara with Jefferies. Please go ahead.
Great. Thanks, perhaps a one for Mike Mcferran, and just picking up a little bit around that 40% target that you mentioned with as it relates to F 30 margin over the next three years.
Perhaps you unpack that a little bit.
Give us maybe a little sense of you know what gives you confidence of hitting that target, obviously, maybe what what could accelerate it or perhaps even yeah, even push it out but any additional color you can provide around that number would be would be helpful. Thank you sure happy to Jerry Yeah.
Yeah I'll start with you know we as you know we don't put forward a lot of forward looking guidance like that so while we can't guarantee anything in the past when we've made outlook statements about where we think the margin would be and others I think we've.
Hopefully either consistently matter to or under promise and over delivered so I.
I think as far as the rest of it getting pushed back out I think that's low you know our margin over the last 12 months' expanded 230 basis points that over the last two years has expanded by 540 basis points.
The default that what's gonna impacted and the timing of its really timing of deployment I mean that when we talk about our Asia, while not yet earning fees all would be if we continue to grow this quarter with all of our capital raise and when we put that capital to work in the market backdrop for doing so is it going to bring those.
Management fees online as Jay I know you've heard us talk about in the past, it's really the lifecycle of our businesses the costs related to that capital are already embedded in the front today in our investment teams on capital raising teams are not investment functions. So we are operating with those expenses leading in front of that.
Revenue coming online and as a result, when that revenue comes on line. It comes in at a much higher margin that we operate out so really just give me a function of that but when we look at the amount of a AUM not yet earning fees. The funds that's related to and how frankly, just they had continued expense discipline and trajectory of the business.
I felt you know 40% with it as a run rate within three years was definitely achievable and it may happen Ah Walter.
Great I can answer your question.
Sure.
Our next question comes from Craig Siegenthaler with Credit Suisse. Please go ahead.
Hey, good afternoon, everyone hope Youre doing well thank you Craig.
I want to start with E com five and I know its still a young fun, but I wanted your perspective on how the businesses are positioned doing and also on the <unk> on the performance since inception.
Sure we have 'em, we have Matt as Bennett on why don't we let them handle that.
Great Fantastic. So this is Matt certainly I'll start and been a controlled and so 85.
Answer the question, we feel very good and I'm very optimistic about the font we break it into two parts one being the non energy portfolio and we think we have populated that part of the portfolio you know with a what we call franchise companies just great companies that are coming.
Continuing to weather this crisis and we think you know have very good long term opportunities in front of them. So.
So we feel very good about the non energy portfolio on.
On the energy side, we've had some challenges this year, but I think we've worked very hard to restructure a lot of the balance sheets of those investments and give you know those companies and those management teams a lot of time in an operating room.
To make their way into a hopeful recovery you know of the energy markets overtime.
When you put those two together.
We are still optimistic about <unk> five you know being a good fun and you know in the long term I think that does have a little bit of you know recovery in the energy markets that needs to take place for that to happen.
But we feel good about what we've done what we control.
To try and position that energy portfolio for success in the long term.
Thanks, Matt and just on the energy exposures are you able to quantify how large that allocation has within the larger eight top five and also are those exposures generally upstream midstream or downstream assets.
Sure. So I'll start again, taking the second one first its primarily in midstream assets.
Today [noise] the energy portfolio is about 19% of the remaining value in the a car funds overall.
And you know from a fund five perspective, we're probably now you know on an energy basis closer to you know sort of 40% you know on the invested side unless you know on a fair value side.
And so for US you know getting that energy portfolio back towards you know, making back our money in that portfolio and beyond is sort of what our goal and our hope is.
Great. Thank you Matt.
Thanks, Greg.
Our next question comes from Ken Worthington with JP Morgan. Please go ahead.
Hi, good morning, and afternoon, depending on where you are.
Maybe just some questions about the insurance business. He's the competitiveness of the insurance market business for alternative managers rising.
We did see some competition for E.L. recently I'm not sure. If that's a one off for or you know you know are you seeing more of that.
And whether the deal for LNG was competitor or not can you highlight maybe the factors beyond price that influenced.
Aries sort of you know win of that deal.
Thank you.
For.
So I would characterize it as.
You know competitive, but but organized competition in the sense that areas and those that looked like us are all.
Seeing the same long term trend which is.
The insurance market is struggling with low interest rates for longer.
ER and long duration liabilities with the inability to generate asset returns or to meet the needs of that portfolio. So if you just think about the evolution.
Of that dynamic not surprisingly prior to folks like us aligning more strategically with insurance company platforms, we were managing and continue to manage a significant amount of capital on behalf of insurance company clients because the name of the game is to transition being just a liability orient.
Good.
Manager and start to figure out how you can actually generate differentiated asset performance and excess return.
And I expect that that trend is here to stay will continue and will accelerate.
It is a very large market.
I think there's plenty of room for all of us to continue to build our insurance businesses alongside our core business.
But what I would comment on is actually expanding a the the playing field. If you will for what it means to be an alternative fixed income manager so a lot of the product.
That makes sense for the insurance company clients for the captive insurers is higher up the balance sheet.
I would call fixed income.
Traditional fixed income alternatives or high grade fixed income alternatives as opposed to.
Some of the you know historically traditional private credit assets. So in many respects its expanded the opportunity set.
For folks like us and the competition like I said, it's consistent so those of US who have a commitment to building the insurance business.
Our you know our building it but we've not seen a lot of new entrants coming in because again I think you need differentiated sourcing at scale.
Right and you need the access to the capital and so I think that the people who are in the market are the ones that are going to continue to scale.
Great. Thank you very much.
Our next question comes from Mike Carrier with Bank of America. Please go ahead.
Afternoon, Thanks for taking the questions.
So overall investment performance has been strong for you guys, but the longer code is around it tends to have more of an impact on some of the smaller in the middle market companies, just given your skill and that part of the market. What are you seeing in terms of areas of challenges or or possible opportunities.
Prices gotten cheap enough to shift into some areas that you guys have avoided thus far through the cycle.
Yes, I'm glad you bring up middle market kind of as a.
Concept to think about how the crisis is playing out because areas is squarely a middle market.
From but the definition of middle market, obviously continues to expand that it's probably no better place to look then a RCC in some of the comments that kept and the team made yesterday around average issuer size now in excess of $100 million of EBIT da and you know some of the return opportunities that were.
Seeing there relative to smaller companies so.
I believe smaller companies, obviously have fewer levers to pull in navigating the crisis days or less consistent access to liquidity may be less you know durable business models are less institutional quality.
Opportunities for exit and so we would expect to see more stress in the lower end of the market.
On the upper end I think Fortunately most of our deployment is in the upper end of the market and so you can see how that's benefited performance would be in place book.
As we continue to get more clarity around the forward earnings picture, yes, there should be an opportunity for us whether it's through our special opportunities business alternative credit for direct lending to go in and be a liquidity provider to those companies in those asset owners.
I will tell you right now that's not where we're seeing the best relative value because we're putting money to work actually at higher rates of return and higher quality assets given the capital.
Mission see there's just a lot of people who can write a check into a smaller company situation relative to people with our capital scale and that's actually creating a little bit of a perversion in terms of the risk adjusted return opportunity down market, but if history is any indicator clearly that should present itself to us both in terms of buying portfolios, but also coming in with.
Rescue loans to digital assets and individual companies.
Got it okay. Thanks, and then just on the pure some of the strategic moves that you guys have made it a position areas for growth opportunities in Asia I know, it's still early on some of the moves that you made but just wanted to see how it has been in early days in terms of the progress, particularly given that at least for me.
Coded standpoint, you some things you've seen in some of those markets to be kind of further longer or more past.
Yeah. It's interesting one of the reasons why we wanted to build out in Asia. As we've talked about is clearly that's where a significant amount of global GDP growth is going to come over the next 20 years, but we also want to have a window into other parts of the world as you know despite the current administration's view as the economy globally.
This is a we want to be global it isn't interesting.
Juxtaposition, because you know those economies are you know at a different phase in terms of the recovery or and so their opportunity set is developing along a slightly different trajectory, but as I mentioned earlier.
Our.
Asian vehicles had the ability to invest flexibly through the cycle the same way that our European and U.S. do so similar to the path that we've been on where they were active in the liquid markets.
Earlier in the crisis and now we're starting to pivot more towards regular way investing their marina.
Deployment has been very strong, particularly in our special situation strategies there.
As I mentioned, we're in the market now fund raising for our third senior direct lending fund and you know that's already as I mentioned close to $1 billion on a $1.2 billion cover.
Having been launched in Cove. It so so far so good obviously, it's early but.
The value proposition that we underwrote both in terms of scale a window into the world and a return generation is all playing out as we hope.
Great. Thanks, a lot.
Our next question comes from Alex Blostein with.
<unk>.
Please go ahead.
A great Ham Hello, everybody.
So Mike wanted to ask you about M&A broadly on both as a buyer on but also maybe as a seller. There's obviously been a lot more speculation much more in the traditional set of the world but.
But the alternative side is where the growth is and we obviously in some some firms comment on that as well. So how do you guys think about the momentum you having in the business today relative to an opportunity either as a buyer to partner with somebody for you know distribution.
Or the other way around if somebody could could plug you into their distribution and accelerate growth that way. So I know a little bit of a bigger picture, but curious to get your thoughts on that.
Sure. It's a great question and we've we've I think been pretty true.
Transparent that we believe that there is a long term and I would I would emphasize long term trend of convergence.
In asset management between retail and institutional as well as traditional and alternative and so you know if I look forward 10, plus years I think those lines will continue to blur as these business models continue evolving and move towards scale I think the challenge we have you know candidly.
He is when you look at the fundamentals in our business.
We've been growing 15% to 25% per year across every functional area in every financial metric.
We have secular tailwinds in terms of the appetite for our assets.
The structure of our business doesn't you know has a mark to market volatility the risk of outflows or the risk of fee compression that you see in the traditional space and so on and so forth. So its hard frankly for us to want to lead.
ER into that convergence trend, because we have such winded our back continuing to execute on our playbook in alternatives that to divert our attention towards business models that are struggling for growth struggling for margin expansion struggling for form as I, it's hard to.
See the industrial logic in that but we do have an eye on what is a long term vision for the future where you know they will be great asset managers and not great asset managers globally, and I think we have to be open you know to.
New definitions of what it means to be alternative or what it means to be traditional in the meantime, as you've seen we will continue to be active on the acquisition front.
Where we can add new capability new distribution.
New geographies that we think will accelerate our growth into the favorable backdrop as we've talked about before though the bar for acquisitions is getting higher.
Because as we've demonstrated with things like special opportunities or alternative credit. We're now at a size and capability, where we can bring team.
Teams onto the platform surround them with capital and structure and actually grow pretty sizable businesses organically I in a way that is much more accretive to long term value creation and buying so while we look at you know look at all things the bar.
Well, it's always been high I think is getting higher just given our ability to organically grow some of these you step out strategies.
Correct.
Great makes sense agree to all that.
Cleanup question for for the other Mike on the on the new segments as their strategic initiatives second the way you guys break it out.
You help us think through sort of the growth path there on the on the acid and fee side and also the incremental margins there because from the segment reporting it looks like the margin obviously quite high in that part of the business just curious about sustainability of that margin and how that sort of translates with more fees and are you I'm coming into that part of the model over time.
Yeah look that's going to be.
Again, a growing area and we I mentioned in my prepared remarks, you know, we so areas SSG is in there.
A speed is going to be in there.
Hi, it's I wouldn't think it would be challenging to try and.
Focus too much on the margin of that business because that business is going to have different things going into it and es segments evolve and grow something tangible probably will you know I expect over time will grow out of that.
<unk> segment to become their own segments in the future. So I I know you're looking for is a bottling direction on it that I think challenging.
What I would say is by the when you look at the margin I would highlight that were reported that segment consistent with our others. So a portion of the costs that relate to what we would call more corporate activities of the into that segment are in the operations management Group segment. So I think thats in the appendix of our earnings presentation.
See some of that there. So this is more this is definitely the apples to apples comparison to our there.
But.
But like I think it was after we have a apogee we closed the a little easier to look at it with a couple of things that you'll start to see more of a run rate around that.
Awesome, great. Thanks, very much again.
Sure. Thanks.
Our next question comes from Chris Harris with Wells Fargo. Please go ahead.
Thanks, guys.
Another question on the insurance business.
Look I know, it's very very early days for you guys here and you highlighted you know how big the market opportunity is well, we just step back and look at the environment. I mean interest rates are just so low.
Do you think this business can still be an organic grower.
With interest rates, where they are.
Or for now with this well growth in this business be more about M&A opportunities.
Yeah, I think it's both you know weve talked about before one one of the benefits of our approach is that we have not been encumbered by any large legacy balance sheet exposures in the way that we're approaching the the build of our insurance platform. So you know I think if we were sitting on a.
[noise] large legacy book and we had to deal with.
The in force liabilities in this rate environment, we may feel differently, but you know here's what we know with low rates everybody's going to be struggling to generate the asset returns that they need to support their actuarial models and thats true, whether you're a pension fund or an insurance company.
Or an individual and so low rates and another themselves I think you're going to continue to drive people to you know need to think about savings, but think about how they generate return.
Through the retirements, so I think the whole retirement market.
You know annuities the top of the list is going to continue to grow at the end of the day the way that we and others are.
This business is it's a spread lending business.
And so as long as we can continue to use our differentiated origination and structuring to generate excess spread.
Then it will continue to be a growth vehicle for us and I am pretty confident that's that's the world that we are going to be living.
Okay. Thanks, a lot.
Our next question comes from Adam Beatty with you'd be up. Please go ahead.
Hi, Thank you for taking my question in the commentary you highlighted a cross asset deal involving real estate and just wanted to get a sense of you know to broaden that out how much how many of those types of opportunities that you're seeing a hand or generating perhaps in real estate.
Or perhaps otherwise and how you feel you're competitively positioned for deals like that thank you.
Sure. So those who have known us a long time, Adam have always heard us talk about what we call the power of the platform and collaborative culture and I know a lot of people.
Talk about similar approaches I actually think that it's harder to execute on a than many people. Appreciate I think you know many businesses. It looked like ours that didn't grow up with the sense of partnership and collaboration that we have can get silo.
And not have aligned incentives and that can create you know some constraints to the type of active collaboration that were you know we were highlighting in the prepared remarks.
That is core to who we are and how we invest in any environment. So as an example, if you harken back a couple of quarters I. When we did a unit tranche for company called or don't know, which is the largest European unit tranche a ever recorded in that close to 2 billion that was actually done as a collaboration.
Between our U.S. direct lending team and our European direct lending team.
So that's a regular part of the business and the reason that that happens is a lot of these situations are going to force their forcing mechanisms for these teams to come together.
There are there is a need for capital scale or it's a hybrid you know a net lease transaction, where you want to bring credit expertise together with real estate expertise or in the case of this unit tranche you have a you know a U.S. sponsors are looking at a European assets. The market is kind of pushing us into that active collaboration when you get into a crisis.
Just like the one one we're in now.
All of those catalyst for collaboration just get amplified.
Ah because there's so many unique situations that have structural challenges and then where if we can bring capital scale capital flexibility unique information.
Insights relationships et cetera, it's better for everybody.
So I would say you know now more than ever we're collaborating now in more than we ever have but its not unique just to being in the middle of a crisis. It's it's core to how we manage the business in the quarter. The culture in terms of how people think about partnership here.
Great that's very clear thank you Mike.
Yeah.
Our next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.
Hey, good afternoon. Thanks for taking the question I was just hoping you guys could diving a bit more on the organic initiatives in particular, new organic initiatives the ones you're most excited about their special sits imagine that's one of them you guys have raised some capital there I guess what are some of the others that maybe on the cost of raising capital where you hired folks we've been building out teams which ones.
Could be raising capital in the next year or two how are you thinking about extending out into additional a T. Ses from here.
Yeah, So I'm I don't want to give away I don't want to waste and trade secrets here. So I'll just highlight in our prepared remarks, we talked about funds that are kind of in the Q over the next 12 months that we think will generate you know 25 billion plus incremental equity capital.
Commitments in excess of what we had raised through the end of the quarter imbedded in that our number of step out strategies and.
And those are going to be.
In adjacent markets. So for example, leveraging our direct lending expertise into a specific industries. You know it may be leveraging our health care expertise in private equity into other parts of the health care market ecosystem. So I.
I don't want to be evasive, but there's so many interesting things that we're incubating I'd, rather wait told or their birth and we have something to talk about and then you know happy to drill down on it but what you're highlighting is key to how we're driving the type of growth rate that we are and special opportunities. A great example, alternative credit is another one where obviously.
We've been able to.
Grow that asset base by 50% over the last year and a half organically by bringing new folks in new capital solutions onto the platform. So we have a number of those types of situations that are very far along and I think over the next couple of quarters, you'll you'll get some good good exposure to what those are.
Okay, maybe I could just ask a follow up on your infrastructure and ducting business. I was just hoping you can kind of give an update there on how that looks today what are some of the opportunities that you're seeing not just on the deployment front, but also just from further scaling and growing that platform and you know what might the opportunity set be if we get a blue wave here that maybe has it in for.
Structure spending bill how might that change or catalyze any sort of growth.
Yes. So we we are in the market as we mentioned we had a first close in the quarter on a or.
Infrastructure strategy, which has now been for the most part fully repositioned into what we call climate infrastructure.
And that team both on the credit and equity side is now 100% focused on investing money into the energy transition and that's both renewable infrastructure sustainable infrastructure and renewable technology.
That is where the market is going that is where the opportunity for investment will be I. It's also consistent with where we stand from an EPS G.
Focus standpoint, I think where our investors stand as well or that deployment there has been very exciting.
And it ranges the entire water front of the energy transition from renewable power generation.
Two technology around vehicle electrification or bad.
Battery storage residential solar and things like that so that really runs the runs the gamut.
I think a blue wave would be a massive catalyst for that business given the way that we position the team.
And and the capital there are the current administration has actually been you know.
Favorable for renewables to despite the fact I think that folks probably feel like they're more heavily supported with fossil fuel industry. We've actually seen the business thrive just because there's so much happening at the state and local level and at the consumer preference level, that's kind of pulling that that change through as well, but yes, we have a blue wave or any.
Big renewable.
Renewable energy infrastructure build that's going to you know unlock.
Unlock a pretty significant opportunity set for us.
Oh, great, thanks, whereas a bit yeah, and where to go obviously the the range of what I would call sustainable infrastructure is broader than just a wind and solar. So I think you would see us continue to broaden out there and then geographically right now we've been limiting our.
Investment in U.S. market, but I would expect to see us continue that looked to other geographies is that business expenses as well.
Great. Thank you.
Thanks.
Our next question comes from Jeremy Campbell with Barclays. Please go ahead.
Hey, Thanks, well high levels. Good afternoon. So maybe just a quick follow up on expenses for Mike Mcferran.
First thanks for that color on affirm everi margins over time, so this might be a little more around a clean up near term geography of costs, but looks like corporate expenses went up about 8 million quarter over quarter. Nothing you guys bought up your stake in a pretty wholly foreign business I'm wondering if that lift was from corporate type costs from SSG minority or majority.
Take that didn't really flow into the segment or if there was something else going on here.
Good question, [laughter], I'd say about $2 million of DNA this quarter was related to that.
So I think I had felt last quarter I kind of thought problem Gee, they would probably be pretty.
Prior to including SSG and the low fortys. So we're back to bite off its 41 eight this quarter. We did have some nonrecurring expenses related to some of the capital raising as you can appreciate when you're raising a lot of money time Theyve just book expenses related to work.
Around that I'm actually a lot of professional fees and restructuring costs will be a little more volatile.
But gee they to me a little elevated this quarter I get a function of just that SSG and it's all the capital raising.
Got it but good reason for it frankly, yeah exactly and then you know as we look ahead to the ft re close or is there going to be any any lift on the corporate side, there too or is that going to flow mostly through the segment.
That's going to flow through the segment.
Thanks, a lot.
Sure.
Showing no further questions. This concludes our question and answer session I.
I would like to turn the conference back over to Mike Garrett Getty for any closing remarks.
No. We appreciate everybody spending time with us, we hope everybody stays safe and well and we look forward to speaking with everybody next quarter and I also do want to congratulate my L.A. colleagues on the Dodger wind as a disgruntled fan tough to see but in the spirit of partnership I'm happy for all of you. So.
Congratulations and we'll talk to everybody next quarter. Thanks.
Ladies and gentlemen, this concludes our conference call for today, if you missed any part of today's call markets replay of this conference call will be available through November 20, 2020 by dialing 8773 or four.
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All right Great. Please reference conference number 101479 core sex an archived replay will also be available on a webcast link located on the home page of the Investor resources section of our website.