Q1 2021 Ares Management Corp Earnings Call
Welcome to Ares Management Corporation's first quarter earnings conference call.
At this time all participants are in a listen only mode.
As a reminder, this conference call is being recorded on Thursday April 29 2021.
I will now turn the call over to Carl Drake head of public company Investor Relations for Ares management.
Everyone is safe and healthy.
I'm joined today by Michael <unk>, Our Chief Executive Officer, and Michael Mcferran, Our Chief operating Officer, and Chief Financial Officer.
In addition, Bennett Rosenthal co chairman of our private equity group Kipp Davir head of our credit group and Matts working at co head of our private equity group will be available for the question and answer session.
Before we begin and I want to remind you that comments made during this call contain forward looking statements and are subject to risks and uncertainties and.
Including those identified and our risk factors and our SEC filings.
Our actual results could differ materially and we undertake no obligation to update any such forward looking statements.
Please also note that past performance is not a guarantee of future results.
During this call, we'll refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles.
Please refer to our first quarter earnings presentation available on the Investor resources section of our web site for.
For reconciliations of the measures to the most directly comparable GAAP measures.
Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase and interest in any Ares fund.
This morning, we announced and we declared our second quarter common dividend at 47 cents per share.
Which is consistent with our prior quarter dividend and represents an increase of 17, 5%, although our prior year's quarterly dividend.
The dividend will be paid on June 30th 2021 to holders of record on June 16th.
We also declared our quarterly preferred dividend of $43.75 per series, a preferred share which is payable on June 30th 2021 to holders of record on June 15th.
Now I will turn the call over to Michael irrigated and who will start with some quarterly financial and business highlights.
Great. Thank you Karl good afternoon, everyone. I Hope you are all healthy and wish you well.
As the economy recovers on the backs of significant fiscal and monetary stimulus.
Progress on the health care front, we're off to a strong start this year across our business.
Looking back and an unprecedented year of volatility and change we believe that 2000, twenty's validated the resilience and durability of our business.
The positive fundamental growth trends for our company and the strong secular tailwind driving the alternative asset management industry.
As we look forward for the rest of 2021, we see constructive market backdrop and continued momentum and the four core drivers of our business strong fundraising deployment investment performance and realizations.
Speak to each of these specifically, but simply put as we execute well and each of these fronts, we're confident and our ability to drive continued long term value for our shareholders and to maintain our guidance of 15% plus FRE growth for the foreseeable future.
We reported a win well in excess of $200 billion, a major milestone for the company after reaching 100 billion just four years ago.
Our AUM has grown nearly 40% year over year compared to the first quarter of 2020.
The first quarter also reflects our 16th consecutive quarter of sequential FRE growth with F. R re up 38% year over year, and we achieved a new record margin of 38%, which reflects and nearly 500 basis point expansion and our margin year over year.
Following a record year of capital raising and 2020, we've continued our strong momentum with over $10 billion of capital raised during the quarter.
We held a final closing for our flagship illiquid alternative credit fund Ares Pathfinder fund with total commitments of $3 7 billion, which was oversubscribed and that its hard cap.
We were very pleased with the investor acceptance for this global flagship fundraise, which brought and 50, new investors to Ares and over 80 unique total investor groups.
We're also proud to deliver on our purpose driven commitment to flat and therapy by Tony and at least 10% of the Ares Pathfinder funds carry to charity with the hope it and inspiring others around the industry.
We also announced the successful final close of our real estate opportunity fund three which raised $1 7 billion ahead of its one and a half billion dollar target and more than 70% larger than the predecessor fund and related co invest vehicles.
This fund raise coupled with our fifth European opportunistic fund that we completed in 2019 are great. Examples of how we're meaningfully scaling our core real estate funds by at least 50 per cent and our overall real estate platform.
And the public markets, we raised $1 billion and our first stack areas acquisition Corp.
We also continued to raise capital and our permanent capital vehicles with $1 $6 billion and debt and equity for Ares Capital Corp, Our BDC, and we raised $640 million and debt and equity for Ares commercial real estate are publicly traded commercial mortgage REIT, which continues to have strong growth prospects and the commercial mortgage sector.
Yeah.
As you may have seen and our separate press release. This morning, we announced the final closing of our fifth European direct lending fund Ace five which was oversubscribed and also hit its hard cap of 11 billion euros, representing the largest European direct lending fund raise to date.
With strong investor support Ace five surpassed its 9 billion euro target and only eight months after fun lunch.
The final fund size represents an increase of approximately 70% versus the predecessor fund.
The fund attracted strong backing from a diverse group of nearly 180 investors, including 65 investors new to Ares.
With more than 80% of commitments from existing areas investors Ace five received strong support from the firm's broad and growing investor base.
The areas European direct lending team manages 45 billion of AUM pro forma for the rays and has approximately 70 investment professionals, which we believe makes ares the largest capital provider and the European direct lending market.
Including anticipated leverage the total available capital for Ace five will be approximately 15 billion euro.
The fund is already off to a strong start benefiting from areas as market leadership position, having committed $1 7 billion euro across 11 investments to date.
Looking forward as we mentioned on our last earnings call. We have a strong pipeline of funds either in the market or coming to the market later this year across all of our businesses.
And we continue to think for 2021 could shape up to match or exceed the record fundraising that we had last year.
Our broader platform has set us up for a deeper and more diverse fund raising pipeline as investor appetite for our private market alternatives are increasing.
Next I'll touch on deployment, where we had a strong quarter with over $10 billion of gross invested capital, including nearly 9 billion of deployment from our drawdown funds, which represents an increase of over 60% from the first quarter of 2020.
Our ability to continue to find attractive deployment opportunities across our business illustrates the power of the platform and the meaningful competitive advantages that we've created and sourcing and deal execution.
And lastly, I'll touch on our investment performance and.
As you can see throughout our earnings presentation, we had strong returns and Q1 across our strategies, including gross returns and corporate private equity of over 16% spec.
Special opportunities of nine 9% U.
U S real estate equity over seven 5%.
European real estate equity of nearly 7% and continued strong performance across our U S and European credit strategies.
I'd also highlight the continued strong performance of our fifth Pan Asian, and special situations fund that launched in 2018 and.
Having a gross IRR in excess of 60% through Q1.
As I mentioned earlier, we believe the market backdrop is constructive and sets us up well for increased realizations as the year progresses, as well as growth and our net performance fee receivable, which Mike will touch on a little later.
In addition to the continued strong momentum and our existing strategies, we're very bullish on the opportunities being created by our more recent organic and inorganic strategic initiatives.
In mid 2020, we held our final close of our inaugural special opportunities fund with over three and a half billion dollars of capital raised against the $2 billion target and we're launching a subsequent fund and the strategy and the near future with a larger target.
I already mentioned that we had the final close and the quarter of our inaugural alternative credit flagship fund Pathfinder, which similarly raised $3 7 billion against the $2 billion target.
With respect to Asia, we could not be more pleased with the great integration and collaboration and that is taking place with our Ares SSG colleagues.
There is strong momentum has done well positioned for the planned launch later this year of our sixth Asian Special situations Fund.
Longer term I'm excited about the growth opportunities for us and Asia and believed that the development of strategies across the different asset class and Asia will complement and enhance our long term growth overall.
Let me also touch on our recently announced acquisition of landmark partners, which we expect to close this quarter.
We believe that this transaction is very timely as the secondary market for alternatives scales to catch up with primary market volume.
Furthermore, the industry movement towards GP led transactions plays to our strength.
With our market, leading global private credit platform, which has nearly 300 investment professionals, calling on more than 850 private equity sponsors. We believe that we have one of the largest direct sourcing opportunities given these relationships and the market today across North America, Europe and Asia.
We also believe that the synergies with landmark will be exciting for us over time, as we introduce products to each other's respective client bases and collaborate on new product extensions.
On the heels of a landmark announcement, we raised $828 million of equity.
Combined with our preexisting strong liquidity position, we have ample liquidity to close this transaction support our active pipeline of organic and inorganic strategic opportunities and to retire our currently outstanding 7% preferred equity, which is redeemable starting at the end of this quarter.
We believe that our strong organic growth supplemented by synergistic strategic acquisitions, and large and growing markets positions us very well and and evolving global asset management landscape.
The alternative asset management industry is transitioning through globalization increased retail investor participation manager consolidation, changing investor behavior, and appetite and rapid product evolution.
We continue to believe that size will be a significant driver of success and outperformance as these markets grow and evolve.
Scale across markets and products allows us to invest more aggressively and asset sourcing.
Allows us to make better relative value decisions across markets allows us to attract and retain better talent and in turn offer attractive and differentiated and investment solutions to our clients.
Today, and well into the future it will be critical to have the capability to offer the broadest set of solutions across the risk return spectrum to both retail and institutional clients.
Now I'm going to turn the call over to Mike Mcferran, our CFO for his remarks on our business positioning and financial results Mike.
Thank you, Mike Hello, everyone and I hope all of you are safe and well.
I will start with a review of our strong first quarter results and our outlook for 2020 one.
We continue to deliver across our core financial metrics with FRE management fees, a AUM fee paying AUM and dry powder, all either at or near firm Records.
This performance is a testament to the resiliency of our firm despite the challenges presented to the last 12 months.
Our fee related earnings continues to grow quarter over quarter, and this quarter's comparable FRE growth exceeded our expectations as we were able to grow sequentially, despite and exceptionally strong fourth quarter of last year.
For the first quarter FRE totaled a $128 5 million and increase of 38% year over year compare to the first quarter of 2020.
Our core to the FRE margin reflects a firm record of 38.4%.
Nearly a 500 basis point improvement year over year as we continue to deploy capital from our Shadow AUM.
Raised new capital and further scale our business lines.
Of note for the first quarter, our fee related earnings comprised more than 90% of our realized income and for the last 12 months. After we accounted for more than 75 per cent of realized income.
FRE for the first quarter was driven by management fees totaling 327 million and increase of approximately 20% over the first quarter of 2020.
Turning to expenses, our combined compensation and general and administrative expenses grew by approximately $11 five per cent compared to the first quarter of 2020.
Realized income for the first quarter totaled $137 million up slightly year over year as most of our realizations came for a partial secondary sale and one of our private equity portfolio companies that as a company.
After tax realized income per share of class a common stock net of preferred stock distributions was <unk> 46 cents per share for the first quarter up from 45 cents and the first quarter of 2020.
Our first quarter realized income was modestly impacted by a realized net investment loss stemming from our investment and our legacy a cough Asia fund for more than a decade older vintage.
These assets were previously marked down and our balance sheet, but we realized the last this quarter.
This loss accounted for a three center reduction and our after tax realized income per share in the quarter.
Next I will turn to our AUM and related metrics.
As of March 31st our AUM totaled more than 207 billion compared to 197 billion at year end and not more than 39% versus $148 6 billion at the end of the first quarter of 2020.
Our AUM growth and the first quarter was largely driven by organic growth and strong asset appreciation, including gross new capital commitments of 10 billion and market appreciation of $2 8 billion.
Our fee paying AUM total of $127 6 billion at the end of the first quarter, a slight increase quarter over quarter, driven by an increase and new commitments and deployment of 7.9 billion and offset by $2 3 billion and distributions as well as the first quarter stepped down from <unk> five.
Compared to the first quarter of 2020, our fee paying AUM increased over 25% driven by deployment across our strategies, especially in our U S and European direct lending funds.
Our available capital sits at $56 8 billion at the end of the first quarter remain near a record high and up 71 per cent year over year, providing us with a large pool of capital for deployment as the markets continue to recover, albeit on leap unevenly from the pandemic.
We ended the quarter with over 40 billion of AUM, not yet paying fees of which approximately 38 billion is available for future deployment and have deployed corresponds to potential annual management fees totaling 396 million, which represents over 30% of our last 12 months' total management fees.
Lastly, our incentive eligible AUM increased 47% year over year to $124 4 billion, a great indicator of future value creation opportunity for us.
Note that $49 2 billion of this incentive eligible AUM was uninvested at quarter end.
The first quarter of 2021 saw continued appreciation of our net accrued performance income balance, which now sits at $424 3 million.
This represents a 16% increase for the fourth quarter, and and 81 per cent year over year increase for the first quarter of 2020. Despite substantial realizations over the course of the year.
With this level of net accrued performance income and Uninvested incentive eligible AUM. We believe we have the pieces in place to continue to generate meaningful performance income over the long term for our shareholders.
I'll now turn it back to Mike for his thoughts on our future outlook and concluding remarks.
Yeah.
Thanks, Mike.
We believe that Ares is well positioned to today to take advantage of our strong competitive position and the favorable tailwind and the global alternative asset landscape.
Investors are allocating more capital into alternative investments while at the same time looking to consolidate their relationships with broader scaled managers.
And this plays to our strength as a broad solutions provider, having also delivered time tested and attractive returns to our clients.
Over the past five years, we've achieved tremendous growth and the wallet share with our existing clients as they invest larger amounts and subsequent funds and expand their investment exposures across the Ares platform. We believe that these trends will continue.
As a result across the alternative landscape will look to continue growing our products capabilities and geographical reach to provide additional differentiated investment solutions for our clients.
Mike mentioned with over $40 billion and AUM not yet paying fees, we have strong near term visibility for earnings growth.
And when you add and the growth avenues that we have and large and expanding addressable markets. We believe that Ares is well positioned to remain a high growth firm for many years to come.
I want to and our prepared remarks by simply expressing how impressed and grateful and proud I am of the hard work and dedication of our team.
The amazing growth and investment performance that we've delivered is a direct result of our employees' strong commitment to collaborate and work as a team with a shared set of common values.
I'm also deeply appreciative of our investors continue support for our company and.
And I. Thank you for your time today and with that operator, I think we'll open up the line for questions.
At this time, if you would like to ask a question. Please press Star then one on your attached on phone and.
You would like to withdraw your question. Please press Star then two.
Our first question today comes from Robert Lee with K B W.
Great. Thanks for thanks, Mike and Mike.
And one is doing well.
And I just had a quick question.
Actually on your initiatives, maybe and high net worth channel I mean, obviously.
And ARCC and eight for.
You may be and elaborate on how youre thinking about.
Like some of your peers and I'm happy instead.
That marketplace more broadly.
And obviously, some fears and for that.
Non trade real estate or credit products. So what are you how are you thinking about that.
Okay.
Sure.
So we think about and a lot I think the good news is we have a well established brand and in that channel already through the success of.
Our listed vehicles and the form of ARCC acre and a R. D C.
And we also have a pretty healthy track record of fundraising success and investment performance and the high net worth and ultra high net worth segments of those those systems as well if you actually look at private banks are over the last five.
Years, that's probably grown at about 25% compound annual growth rate and terms of.
AUM and the channel and high net worth is actually been our fastest growing.
And segment with about 42% CAGR over the last five years, where we're.
We're in that market them with new product I think we've talked about this on prior calls we have a large and growing a credit interval fund that's.
And that's enjoying good success and performance and our expectation is.
Is that will continue to put product through that.
Through that channel over time.
Great and then maybe this is a quick follow up I guess with A&P.
Payable at this point and you.
And you did touch on it but maybe update us on how and how you're currently thinking about you are your M&A priorities or where.
Besides infrastructure, maybe where you.
Seek out opportunities.
Opportunities.
Yeah, we've talked about this before and maybe just to.
Zoom out quickly and.
And I've mentioned this in our prepared remarks, when we think about growth. We think it's important that we are driving high organic growth and supplementing that growth with M&A and.
And you can see how some of the organic growth initiatives and places like alternative credit and special opportunities European direct lending are all bearing fruit and accelerating.
We also continue to drive growth into step out strategies across the platform and that's the biggest driver of our of our sustained growth when we execute on M&A.
It typically is going to be either to tuck in.
Capability.
Or set of relationships that we don't currently have where we feel that we can acquire it and attractive.
Price that's strategic.
And when we're talking about larger deals like a landmark.
For like an a M P. It's with a view that there is a large addressable market.
That is growing where we have maybe a heightened sense of urgency to be in that market in scale.
And so SSG is a good example of that as well, where we believe that the long term growth trends and Asia.
Warranted and acquisition to acquire capability track record brought office footprint multi asset class capability investor relationships et cetera.
And candidly and I've said this before now that the firm is at 200 billion of AUM.
And and we're enjoying the success that we are the you know the product gaps if you will or are pretty narrow.
And.
Secondaries with a big a big part of it for US and landmark is filled that gap.
We continue to think that the infrastructure market is an area that we should be focusing on both organically and inorganically.
We are growing well and our core and for our business, but feel that we want and globalize and scale that.
And then in and around real estate as we've talked about before just given the size of those addressable markets globally.
We believe that there is an opportunity for us to continue to expand our real estate group through acquisition as well.
Great. Thanks, so much.
Thanks, Rob.
Our next question comes from Jerry O'hara with Jefferies.
Great. Thanks.
Good afternoon, everybody I was hoping one maybe for Mike Mcferran, but perhaps book for you guys can weigh in a little bit just around the pace of deployment that we might be able to expect as it relates to the $48 billion of incentive eligible AUM that is not yet and invested and then perhaps if there's some color.
Around deployment themes that you might be able to elaborate on and a little bit that would be that'd be helpful. Thank you.
Sure I can.
Take us out on that one.
And if you look at the composition of our dry powder today, as Mike mentioned that $57 billion of available capital.
If you segmented that down to the AUM not yet earning fees its 40 billion.
And 34 billion of which sits within our.
Global credit business.
And for those of you who listened to the ARCC call yesterday and.
And I think there was a pretty positive tone on the market backdrop for deployment.
And obviously as the markets recover.
Pandemic and liquidity and the markets persist, we just expect transaction activity to remain healthy if not elevated throughout the rest of the year. So as we sit here today, we had a very active Q1.
On the heels of a very active Q4, and I remind people Q1 tends to be our seasonally slowest quarter for deployment and so to see that kind of.
That kind of deployment in Q1, I think is a really positive sign.
I think the good news is that we're seeing deployment opportunities across the entirety of the platform.
M P.
<unk> is very active and.
And we're seeing transaction flow, increasing there, particularly as there is no discussion about capital gains rates. So I think you should expect to see transaction activity increase.
And.
Real estate's active so I'd say Jerry the the good news is you know.
15 months removed from the depths of the pandemic. The the market is feeling pretty strong from a deployment standpoint, and I think that should translate and true.
And the AUM not yet earning fees.
Okay.
Great. Thanks for taking my question this morning.
Sure.
Okay.
Our next question comes from Craig Siegenthaler with Credit Suisse.
And.
Hope, you're all doing well and congrats and crossing 200 billion.
Thanks, Craig.
So Mike after another record breaking direct lending finding and Europe could you update us on the competitive landscape and private credit in Europe, and we're seeing larger capital raises across the industry, but I wanted to see how this is impacting spreads and credit quality and maybe you can highlight some of them notes are that are in the Ares.
Is this.
Sure and I'll I'll I'll.
And I'll address that and then Kipp is on the line too. So if he has any color commentary kept feel free to.
Time, and you know as we've talked about for now 20 plus years as the private credit markets have developed and we solidified our leadership position the moats simply put our origination advantages I E more people and more offices.
And with more local relationships.
And that sourcing engine at scale allows you to be much more selective and the deals that you do which drives outperformance and credit and I think that shines through and you look at our track record through cycles. Both in terms of the Irr's deliver but also the infinitesimally loss rates.
That we experience so order of magnitude and private credit.
We have a close rate of about 3% to 5%.
Of all the deals that come through the transom and that that origination engine drives credit performance, our scale of capital and flexibility of capital is also a pretty big advantage, which is why we're so pleased to see the scaling and Europe. The way that we saw it and in the U S.
And the reason for that is you want to cover the broadest set of of available market opportunities.
And from the small and to the market to the large and the market and when you go through volatile markets like we went through in 2020 and the ability to deliver certainty of close and flexibility of of structure at scale is a pretty unique a unique.
A unique capability and so you see us now and Europe doing what we've been doing and the U S for years at the large and to the market.
And which has kept talked about yesterday is actually offering some pretty compelling.
Our risk adjusted return relative to the core middle market today and.
And then lastly, which is something that we're really enjoying and you really see the benefits of and a market like 2020 is just the value of incumbency.
And year in and year out both in Europe, and the U S. We see that roughly 50% of our transaction flow.
Some cases north of that is coming from our existing portfolio as they're growing deleveraging and re leveraging making acquisitions and transitioning.
Transitioning ownership, so when you build that big portfolio.
Globally that we have the embedded value of of being able to re underwrite that portfolio and recommit to it is a pretty big.
Big advantage.
I think the competition.
No.
It feels more competitive in the sense of the number of folks that have capital to deploy.
But at the risk of sounding and modest I don't think that we're experiencing that increased liquidity as significantly more competition because of some of these competitive advantages that I talked about in.
And the European market, and particularly we have such a large advantage in terms of our capital base and the number of people that we have deployed against the market opportunity are we think that we've created some pretty significant white space between us and and others and the market are the only other comment I'd make to your question is in Europe.
We're not seeing a meaningful impact.
And on spreads and upfront fees from the amount of capital that debt.
And that's in that market, which I think speaks to the resilience of the asset class.
And.
I don't know kipp anything you'd add to that.
No I don't think so I think thats, a really good summary might come and Craig. It's just you know the banks continue to lose market share and there continues to be you know increased acceptance I think of direct lenders right and just our market share and that market continues to go up.
Thanks, now very comprehensive and my follow up is on Ehow five and net IRR continues to rebound it's in striking distance of the prep rate and maybe you can remind us how the catch up and Matt for work as.
As it crosses the prep right and you could have a real large increase and future realized performance fees for the fine.
Yeah, Matt, Matt and Ben It are on maybe they want to talk about the what we're experiencing and that fund because it's generating some pretty extraordinary performance right now and.
And then maybe Mike can.
Help me out with the math correct.
Great. So this is Matt and thanks for the question <unk> five is seeing some nice increase and performance I think we were up about 16% and the first quarter and.
We are seeing increases really in a few different industries health care, which.
And which we have three different health care investments and it got five both are having strong underlying growth as well as good valuations and this market <unk>.
Services, where we have a couple of services investments that are both growing nicely.
Even in the COVID-19 environment and as we.
Well as valuation.
And we had some recovery in energy prices of energy have increased and we're seeing some increases and optimism and energy.
So we feel good about the <unk> portfolio and.
And we feel good about and a continued hopefully increase and IRR I think and that portfolio as we see the continued underlying growth and each of those companies that we are that we expect.
And what what's amazing Craig two acre five is a bright spot, but if you look at some of the older vintages.
A cough one through five and the aggregate.
Even with the energy exposures and that that composite was up about 40% and over the last 12 months.
Mike Mcferran do you have.
Do you want to talk about the.
Catch up and catch them and yeah, yeah, So Craig once we clear the prep.
There's.
A catch up mechanism on the G. P. L. P split and then once you get past that and I'm going to call that let's say, it's around a nine 6% IRR there and you just have your 80 20 split.
So it's a little disproportionate in between the two but that's usually a short window.
Mike is it 2080 kind of inverse and catch up or is it 100 zero I I just forgot the math on that one.
I don't have enough for me I'm going to go off memory and I think it's I think it's 80 515 or 80 20, so the inverse sharepoint.
Got it.
Thank you guys.
Sure. Thanks, Craig.
Our next question comes from Alex Blaustein with Goldman Sachs.
Hey, good morning, or good afternoon, and actually I guess.
And for you guys and capital management, given your recent secondary offering and with M deal not happening should we be thinking about.
The plans to retire the prep that you talked about earlier with cash on hand, or with using with issue and potentially a new prep for new debt.
And I guess bigger picture as you continue to evaluate acquisition opportunities and the space. How should we think about your ability to sort of fund them with your current resources available as opposed to having to tap the equity markets again.
So let me start with that Mike or Yeah go for.
Sure.
Hi, Alex we are look I think with this equity raise we are and a great position from a liquidity standpoint, we were and our strong position before so it was very opportunistic for us.
I think we're set up from a leverage standpoint and from a cash on hand standpoint that from a combination of clothing and landmark and as we mentioned on the call I'll take it out the press and or both.
We have the capital to do both as well as support organic opportunities and as Mike mentioned euro potentially inorganic opportunities.
If we were to tap any incremental capital it would be opportunistic and the debt markets.
And that would just be a functional and future opportunities and you know both from a capital market standpoint, as well as things we're looking at but.
But I do not envision us.
Thinking about going back and the equity markets.
And anytime in the foreseeable future I think we're well set up.
Great. That's helpful. And then a couple of smaller questions here just around the private equity business and I was hoping you guys could update us on the pace of fundraising for a cop six and ultimately when do you expect.
The fees to start coming in and sort of what kind of an application for private equity management fees on the back of that.
Sure I'll start and Mike Mcferran, you could jump and also on the fees. So with a cough six we stand at $4 3 billion and committed today and the fund we expect.
<unk> in private equity, we think about the business really overall in terms of our fundraising activities. We expect in the private equity business overall to raise about 5 billion of capital.
Over the next 12 months, specifically for a cough six we turned on fee and the fourth quarter.
Last year, and so that is already starting to flow in 2021.
And ultimately will and.
And have some increase here in 2021 as we get the final close and have some.
Catch ups, you know relative to the ultimate funds for us.
Mike is that a fair kind of assessment.
Yeah, I would have thought our.
And as you know we are when you have subsequent closes of our committed capital fund you'd also have a bit of those onetime catch up fees that you'll benefit from because.
New Lps will be paying for battery management fees back to the start date.
And so you'll have a little bit of a slow.
When you have a subsequent close as you can see pops off those but then youll just have run rate for us out for that uncommitted.
Yes, that's what I was asking.
This is Ben and I would also highlight we're off to a really great start with deployment with about $1 7 billion of that amount deployed already and committed.
Got it yeah and that all makes sense, thanks very much.
Our next question comes from Mike Carrier with Bank of America.
Yeah.
Great. Thanks for taking the question.
On FRE to expense run the lighter side this quarter on for Mike anything unusual or no any change the outlook for timing target just given the operating margin came and already at 38%.
You probably get some post COVID-19 extensive and.
But just any update there.
Mike just to clarify I couldn't hear your credit and the first part of your question. The second part I get it on the margin and the COVID-19 expenses. What was the first part of your question on FRE for the quarter did you say you felt lighter or.
Are you, saying that the expenses for later this quarter.
And looking unusual sorry.
Oh, yes.
Sorry.
Over here.
Does it feel like Oh, Yeah G&A.
G&A as you know usually if I look at the average for last four quarters. Our runs are on average about $42 million per quarter.
Q1 is a little lighter usually.
Q4, usually runs a little heavier and I will say, it's a combination of there are some benefits and I'd say, it's a couple of million still from reduced travel and related to COVID-19, but at the same time.
Benefiting from scale I think our team has done a great job on expense management I know in the past we've talked about how we opened up a kind of and operational center of excellence and Mumbai, you're and a half ago, that's given us some great operational synergies and cost leverage.
But there was nothing unusual this quarter and G&A. It was more a matter of there was no kind of one time or larger expenses on <unk> and.
And anything else and the capital raise front or whatever but this quarter was you know it was just kind of a clean run rate G&A number again with a little bit of benefit for me just travel.
Yeah.
Okay, Great and then just as a follow up just on the performance income realized tough to gauge and just given the strong performance you guys.
The rise in net accrued balance maybe if you could just update on a seasoning and the portfolio and the outlook and the current backdrop and then if I can just squeeze it in.
The legacy investment that you guys mentioned and that drove the investment losses left fully out and so should we expect that to kind of normalize going forward.
Sure let me start with that one first so as I mentioned in our prepared remarks, it was and old portfolio related to a small fine and that we call it and a cough Asia fund it's over a decade old it's really down to its last handful positions.
You know so.
Our realization this quarter the stuffs already been written down and took a 12 million dollar hit.
As we sit here today, whereas the March 31st.
The remaining unrealized losses against that portfolio. If they were to be realized that those prices would be 19 million and that could come and over the next couple of years I, you know I'm optimistic and hopeful it's less than that but I forget if we were to liquidate portfolio. It marks that would be the magnitude of what you're talking about.
So it's pretty small.
And.
And then the performance income.
And the $424 3 million.
One third of that is and American style waters.
And if there's a waterfall funds of which almost all of it is past and respective investment periods.
So that's kind of sets up a really nice profile and to Mike's comments and his prepared remarks about this as an attractive backdrop for monetization.
Monetization I think about this as a substantial amount of the carry that's and funds that are in effect for what you would call harvest feed mode or is there past investment periods and.
The other thing I'd want to highlight that I think are aware of this and it's going to become more evident in the years ahead, but I think the eight five closing is indicative of how it's going to continue as well.
With over 40% of the carry our net accrued carry and credit funds.
What youre seeing is we have this nice pipeline of accrued carry in funds really going back about $3 for years.
Before that are kind of sequence for one after each other and both of the U S and Europe predominantly and direct lending, but then more recently and special opportunities and alternative credit and where you can start seeing it as a sequence of once those funds start kind of crossing over triggering carry from the European waterfall, that's going to kind of be recurring and grow.
Boeing because you had all of these funds secrets after each other and then and again with something like and as five those amounts and when they grow and grow. So it's something I think we're looking forward to talking more about and putting some math around and the future, but I think what their work and youre going to see with us.
And I think over the next couple of years, there's kind of a differentiated.
Carry profile, where youre going to start having a bit of this kind of recurring.
Kerry that's not dependent upon actually exits of transactions because its coming out for credit book and once it starts that should grow.
And again I think it's something that's going to be unique to our model, but I'll say this could be pretty neat and.
A lot more predictable from a realized income standpoint, when it starts to treasury non.
Hey, Mike and thanks, a lot and it may yes, okay got it.
Yeah, just to jump and I think look the environment for realizations right now.
And from our perspective is as good as you can imagine with the financial buyer bid being incredibly strong.
P O bid being incredibly strong this back bid.
And Theres other alternative strategic buyers. So I do think youre going to see us be considering opportunistic.
Uh huh.
Chances for realization across the portfolio and they may not necessarily be.
Full sale.
Monetization, but we have lots of options in front of us and we're evaluating them and many of our portfolio companies at the moment.
Great. Thanks, a lot.
Our next question comes from Adam Beatty with UBS.
Hello, and thank you and good afternoon.
Just wanted to ask about sort of the Ares contribution in terms of theater.
Theatre anchor capital for particularly I guess for private equity fund given some of the recent raises.
Yeah.
With the offering and the quarter.
Say youre constrained and it anyway, but just how much of a consideration is that use of capital for you guys as you've launched new funds.
Sure hand, and it's Mike I'll I'll take that.
I remind everybody that we.
Our committed to running a balance sheet light model.
The uses for our capital or some of the strategic initiatives that were active on and making commitments and support of existing and.
And new funds.
As a general rule, if you look across the portfolio it tends to shake out to be about 1%.
But what we have seen I think we've talked about this before is that as the firm is growing and as.
Folks are here longer the individuals are actually taking up a more significant portion of what historically would have been the GP commit.
And that's comes with two benefits one is obviously it reduces requirements for.
The use of the balance sheet.
But two it actually drives much better alignment with the private institutional or retail L. P.
Which is actually supportive of of the fund raising.
And so if you look at the growth of the balance sheet, what youre not seeing is the growth of the individual commitments alongside the balance sheet debt is.
This is quite substantial at this point.
And the last thing to remember when we converted.
And to a corp.
And we outlined our capital policy of a dividend pegged to our FRE growth.
With the reinvestment of our realized income into.
The balance sheet compounding at a low tax rate.
That was with the view that we should be able to support the balance sheet needs of our funds through the continued realization of the historical ones. So it gets to a place where it becomes effectively self financing as we scale.
Okay. That's great. Thank you for walking through those dynamics and.
And then I just wanted to circle back on.
M S N B C and the partnership there I mean, it seems like you're broadening and deepening relationships with with existing Lps and also bringing on some new ones and I'm, assuming some of that or much of it and maybe it's product driven given some of the launches et cetera.
But wanted to circle back on that relationship and just get your thoughts or comments or any color on how that's manifesting and helping drive the business. Thank you.
Sure.
I'm glad you asked the question because a lot of times, we there's so much going on here, we talk about the strategic initiatives and we don't we don't always get to go back and report on how they're going.
That partnership.
Over the last 15 years has been fantastic over the last 15 months it has really accelerated.
We have found a number of opportunities to collaborate on where they brought very differentiated balance sheet.
To our platform.
We are very active and hopefully will be and are positioned to talk about some new strategic.
<unk> product launches with them next quarter, but probably the biggest illustration of the type of relationship and value. They bring if you look at the recent equity raise that we did in support of the landmark acquisition pay down of the preferred and and the strategic pipeline F. N B C stood up.
With $250 million and a side by side private placement.
You know and and supportive of the company. So I think that was a pretty.
A meaningful demonstration of the strength of the partnership but also how well its going and how pleased I think we both are with with the progress we're making.
That's great multi multifaceted and it sounds like it thanks very much yet for sure. Thanks.
Our next question comes from Chris Harris with Wells Fargo.
Thanks, guys.
Are you able to talk to us about why the amp deal didn't come together it seem like a.
Obviously, the conversations we're far enough along and it was an asset that you guys for really interested in.
Chris it's hard for us to really comment in detail.
We're subject to confidentiality agreement and as we've talked about on prior calls kind of a unique set of circumstances is just around the ASX disclosure requirements versus our disclosure requirements are Australia and media practices versus U S. So.
And I only highlight that because we've been pretty consistent and our disclosures.
We did confirm and I'll confirm and here again that we were absolutely working good faith.
To a potential transaction around.
All or parts of their private markets business and.
The A&P board ultimately decided to go and different direction.
We may we all may get the benefit over time with increased disclosures from their side as to.
How they landed and that decision, but beyond that I can't really I can't really comment.
Okay got it thank you.
Yep.
Our next question comes from Robert Lee with K B W.
Great Yeah. Thanks for taking my follow up and my.
Mike I'm, just curious and some.
And obviously some of your peers have no capital markets day.
This is you know some more recently and talked about and particularly stemming from their credit businesses.
Way to grow fees and.
And I know ARCC generates structuring service fees and whatnot.
And the potential is.
And you think theres more than you guys and do they ever go down.
And.
Compliment.
Your management fees.
Yeah, I would say at the margin, yes, Rob and we've talked about this before we are very active and the capital markets, but largely where we are active we are effectively passing those economics onto the investors supporting those pools of capital that just a fundamental.
And philosophical view that we have here.
And that being said as our reach expands.
As the Investor base broadens and.
And we have the capability here too.
Monetize our relationships and our balance sheet differently than we have and the past so I think that.
It could be and incremental revenue stream for us for sure, but I would not expect to see us.
With a fully developed capital markets capability and just not the way that were.
And we're set up for the way that we think about delivering value to our and El piece.
Great. Thanks, Mike.
Yes.
Yeah.
And our last question today comes from Michael Cyprus with Morgan Stanley.
Hey, Thanks for taking the question I was just hoping you could update us on your middle market cash flow lending business that is the non sponsor finance business. Just in terms of where you guys are today and in size and some of the initiatives you have in place in terms of building out some of the origination efforts there.
Yeah, I'll give you a.
General view, and then I'll, let kipp.
China and here.
We take a pretty broad view too.
Our private credit business. So if we're talking about middle market corporates.
We've always had a meaningful business.
And the non sports and sponsored part and the market. The reality is the sponsor market is obviously, a big driver of that but we've seen and opportunity over time to <unk>.
Great teams that are focused on non sponsored origination and execution as.
And as well as specific industry verticals.
We've had good success and we continue to grow.
In places like our direct to company, a b L through our commercial finance business.
Our life Sciences, and healthcare industry teams are enjoying a lot of success direct to company.
We have mentioned on prior calls that we've stood up and effort in COVID-19 around sports media and entertainment assets, that's largely direct to company.
Our energy and infrastructure teams, obviously lending direct the company. So that is a big part of the.
The growth opportunity, but I would probably say as big as those get.
They are growing a pace with the sponsor business not necessarily outpacing them in terms of the percentages.
And a throw out and Kip you correct me if I'm wrong, it's probably you know in any given period, 20% to 30% of the business, but obviously on a very large embedded.
Capital base.
And I think that's right and then my call it out as right and you know this as well as items just one other point, we really chose to dedicate resources. So we've been hiring.
<unk> dedicated to do direct to company lending.
And we will continue to simply because when you take somebody in a region and they have some amount of throughput to do deals and they have to choose between $500 billion financing with a sponsor or a $30 million direct to company loan and they of course tend to prioritize the larger ones. So we find.
After a lot of years of not wanting to staff that team.
Differently and we finally chose a couple of years back to staff that team differently and it's actually paying some real dividends for us. So and then it will continue hiring there and it will continue growing as a percentage of our mix.
And.
Great. Thank you.
Okay.
This concludes our question and answer session I'd like to turn the call back over to Mike <unk> for any closing remarks.
Thank you Yeah, I would just close maybe with the.
Summary of where I think we are which is the fundamentals and the company has never been stronger in terms of the setup of available capital.
<unk> investment performance the continued fundraising momentum that we have so.
And with the market backdrop that we're in we are very excited about what 2021 holds for US. So we look forward to updating everybody and our progress and a couple of months.
Ladies and gentlemen, this concludes our conference call for today.
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