Q3 2021 Ares Management Corp Earnings Call
Welcome to Ares Management Corporation's 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 on Wednesday October 27th 2021.
I will now turn the call over to Carl Drake head of public company Investor Relations for Ares management.
Good afternoon, and thank you for joining us today for our third quarter 2021 conference call.
I am joined today by Michael are getting our Chief Executive Officer, and Jody Phillips, our Chief Financial Officer.
Also have a number of executives with us today, who will be available during Q&A.
Before we begin I want to remind you that comments made during this call contain forward looking statements and are subject to risks and uncertainties, including those identified in our risk factors in our SEC filings.
Our actual results could differ materially and we undertake no obligation to update any such forward looking statements. Please also note that past performance is not a guarantee of future results.
During this call we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our third quarter earnings presentation available on the Investor resources section of our website 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 an interest in any Ares fund.
This morning, we announced that we declared our third quarter common dividend at <unk> 47 per share, which is consistent with our prior quarter dividend and represents an increase of 17, 5% of our prior year's quarterly dividend.
The dividend will be paid on December 31, 2021 to holders of record on December 17th.
Now I will turn the call over to Mike Lear, Getty, who will start with some quarterly financial and business highlights.
Great. Thank you Carl and good afternoon, everyone I hope, you're all doing well.
At our recent Investor day in August we highlighted that our growth strategy is supported by a number of key themes. We operate in very large and growing total addressable markets with meaningful competitive advantages.
<unk> and institutional investors around the globe continue to increase allocations to private market alternatives, and we've expanded our product offering and distribution to meet the strong demand.
In addition, we are a consolidator in our market and our recent acquisitions have provided us with new growth engines and capabilities that further enhance our potential.
As you can see from our earnings report. This morning, we executed well on our corporate objectives during the third quarter with strong results across the platform in fundraising investing and fund performance I'll start with a few third quarter highlights and a business update.
We generated particularly strong Q3 growth in our AUM and management fees, both of which were up over 50% on a year over year basis, we raised a record $51 6 billion year to date as we continue to tap into investor demand for private market solutions.
We also once again demonstrated the benefits of our deep teams and broad market coverage across our investment strategies with record deployment of nearly 20 billion.
Our rapid topline growth combined with the economies of scale that we drive through operating leverage translated into more than 70% year over year FRE growth and another FRE margin record of 39%.
Adding in our monetization activity, our realized income grew 36% year over year with a contribution from our core fee related earnings over 90%.
Strong fund performance has also led to a new record level and net accrued performance income, which more than doubled over the past year.
Based on our business prospects market position and the secular tailwind in our industry. We're excited about the growth prospects for our business.
Okay.
Let me update you on our two most recent strategic acquisitions that were both fully incorporated into our third quarter's results.
Landmark partners and Black regrouped.
At our Investor day, we outlined our playbook for building businesses that centered on leveraging the scale of the collaboration across the Ares platform to enhance value creation capture revenue synergies and expand products in distribution.
We're in the very early innings of executing our playbook with both of these acquisitions and we believe that the two acquisitions collectively we're already modestly financially accretive to our after tax realized income per class a common share during the third quarter.
We expect them to be more accretive going forward as we execute on our playbook of identified strategic and financial synergies.
The landmark acquisition, which gave us a large foothold in the growing secondary market for private alternatives is already yielding some exciting results after closing on June 2nd.
In the third quarter landmark raised over $1 billion launched its ninth real estate fund and is now exploring other product extensions and distribution channels.
On July 1st we closed our acquisition of the Black Creek group, which had approximately $13 $7 billion of AUM at closing and it finished the third quarter with 15 billion of AUM.
As previously discussed our Black Creek acquisition is highly strategic and provides a number of important synergies across our fund raising and investing activities.
Black Creek adds core and core plus real estate products, which now enable us to offer a full suite of investment products within our real estate group, including debt core core plus value add and opportunistic investment strategies.
Black Creek also brings a best in class vertically integrated still skill set and industrial logistics, a fast growing segment of the real estate market.
In addition to enhancing our product offerings. Blackrock also has one of the largest retail alternative investment fundraising platforms in the country.
The Black Creek, non traded Reits and institutional open and industrial fund had a great start under Arizona ship with nearly $800 million of new equity capital raised in Q3, along with strong quarterly fund performance.
A key goal for us is to expand our retail distribution onto new broker dealer platforms over time and to meaningfully accelerate the pace of our retail and high net worth fund raising in the years ahead.
On that note.
We recently announced the formation of areas wealth management solutions, which combines our high net worth fundraising capabilities with black creek's powerful retail distribution under one umbrella.
Led by Raj Dhanda, our global head of wealth management areas wealth management solutions will oversee the distribution of areas investment products in the global wealth management channel.
With more than 90 professionals and growing we believe that Ares wealth management solutions is one of the largest retail distribution platforms owned by any alternative manager our retail channel now represents nearly $50 billion in AUM and we.
Expect it to be among our fastest growth areas over the next five years.
The efforts that we've made over the past several years to diversify and scale our product suite are driving meaningful growth in our fund raising.
During the third quarter, we raised more than $20 billion of new capital for the second consecutive quarter, including more than 15 billion directly from existing institutional investors.
By comparison, our nearly $52 billion in funds raised year to date already exceeds a record of 41 billion last year.
Our Q3 fundraising was broad based across our investment groups and included a particularly sharp increase in our perpetual capital, which accounted for more than 7 billion of the third quarter total.
Our perpetual capital vehicles, which include our public vehicles, such as Ares Capital Corporation Ares commercial real estate areas dynamic credit allocation fund our non traded Reits are diversified credit interval fund or a speed of insurance platform open and commingled funds and a significant number of ever.
Green style strategic managed accounts were up 73% over the past year.
We also raised $10 billion in long dated institutional co mingled funds during the quarter.
We're clearly benefiting from our strong investment performance broad offering across a growing and diverse set of clients and the demand for alternative investments from existing and new investors.
Within our credit group, we raised $800 million in the quarter and we held a final close of $1 1 billion post quarter end for our second U S Junior capital direct lending fund P. C. S. Two bringing total fund commitments to $5 1 billion.
Benefiting from the strong performance of its predecessor Fund P. C. S. Two exceeded its $4 billion target and P. C. S. One size of $3 4 billion.
And the final closing we saw very strong participation from existing investors, who contributed approximately 90% of the capital including P. C. S. One investors, who re upped by 140% on average along with existing areas investors from elsewhere on the platform who invested in the strategy for the first time we.
We also brought in 22, new investors to Ares.
We continue to enjoy strong demand for our U S senior direct lending flagship fund with another $1 7 billion in equity commitments and $2 8 billion in debt commitments in the third quarter, bringing total fund capital raised nearly $9 5 billion.
We also added additional closings to our inaugural sports media and Entertainment Fund.
270 million, bringing total commitments to nearly $850 million.
As discussed on last quarter's call. We held our first closing of $1 6 billion and our new open end core alternative credit fund in July which employs an asset focused income strategy and an evergreen format.
The fund is expected to reopen for new investors next year.
We also launched a new open and global multi asset credit fund within our liquid credit group, which is off to a good start with more than 350 million raised during the third and fourth quarters.
And our private equity group, we had a final close of approximately $1 5 billion and a cough six bringing total commitments to $5 7 billion.
<unk> six is off to a strong start with nearly 50% of the fund's capital already invested or committed in a diversified portfolio across its four core industries of healthcare services and technology consumer and retail and industrial.
We recently launched our second special opportunities fund and we just held the first close of approximately $3 billion. This week.
In this first close we're excited that we'll reach three quarters of our targeted fundraise with over 45 investors and great support from existing and new investors and our investors have given us the ability to upsize the fund.
Given the capital raised in this first close we expect our second special opportunities fund will be well in excess of the predecessor fund Ace off one of three and a half billion.
So all together over the past two years, the private equity group has seen significant fundraising activity with over $13 billion raised across its funds, including the second special opportunities fund commitments.
In real estate, we held the final close for our third European value add real estate fund <unk>, three totaling $1 5 billion euros, which exceeded the funds initial target of 1 billion euros, including co investments. The fund raised nearly 2 billion euros of equity for deployment.
We believe that <unk> three represents one of the largest closed end value add real estate funds in Europe today.
The fund has already deployed 500 million euros of equity across six properties to date.
And finally, we raised nearly $500 million in debt and equity commitments in our two institutional open ended real estate income funds, bringing total AUM in those two funds to a combined $4 3 billion.
In strategic initiatives, our speed, our raised nearly $500 million of AUM in the quarter and over 60% of the new capital is sub advised by Ares.
Speed are currently has $3 $2 billion of total AUM with approximately 35% sub advised by areas.
We believe that we now have the infrastructure in place to begin scaling this platform meaningfully in the years ahead.
And within areas S. S. G. Following the final close of our secured lending opportunities fund three which brought total fund commitments to $1 6 billion, which was nearly double the size of its predecessor fund we launched our sixth flagship Asian Special sits fund and expect an initial close in the fourth quarter.
Going forward, we have a dozen commingled funds targeting a $1 billion or more size currently in the market or soon to be launched and we have another nine institutional open end and retail continuous offer funds in the market with 1 billion or more in a AUM.
When combining these fund offerings with the strong momentum in new large institutional SMA as we expect continued strong fundraising over the next 12 months.
Also as discussed at our Investor Day, we have an active pipeline of new funds in development across the platform.
Turning to our deployment as we discussed at our Investor day, the scaling of our investment teams is meaningfully increasing investment activity and efficiency per investment professional <unk>.
During the third quarter, we invested nearly $20 billion of gross capital with approximately 11 billion in our drawdown funds versus $8 1 billion in the second quarter.
We were very active deploying private credit across North America, Europe, and Asia as transaction demand remains robust, particularly as larger companies increasingly tap into this market.
This strong pipeline is continuing into the fourth quarter.
During the third quarter, we were also particularly active investing in some of our favorite sectors, including industrial and logistics and real estate and a broad set of health care investments across our credit and private equity portfolios.
We also continue to find attractive opportunities in the growing renewable energy sector, an area, where we've been actively investing since 2015 with more than three and a half billion in commitments. A great example of this is our pending acquisition of apex clean energy one of the largest developers of renewable energy in the United States.
<unk>.
Our fund performance remains consistently strong across the platform is well.
Notable highlights in the quarter included an impressive 19.4% quarterly gross return in our U S real estate equity fund composite, which brings 12 month performance to 60%.
Our non traded industrial REIT also generated strong gross returns of 10, 5% in the quarter and more than 20% over the last 12 months.
These funds are experiencing strong momentum from rent growth and supply constraints in the industrial sector.
In private equity special opportunities and corporate private equity had another strong third quarter up 10, 7% and five 8%.
With 12 months gross returns of 60% and 54% respectively.
In our secondaries business, our private equity and real estate funds were up 12, 9% and 11, 1%, respectively on a one quarter lag basis and over the past 12 months. The funds were up 49, 2% and 27, 2% respectively.
And within U S and European direct lending Ares Capital Corporation generated a four 2% net return in the quarter and 23, 1% over the past 12 months, while European direct lending increased three 6% in the quarter and 14, 6% on a 12 month basis.
And now I'll turn the call over to Jared for his remarks on our business positioning and our financial results Jarrett.
Thanks, Mike Hello, everyone. The third quarter was yet another quarter of substantial growth for us across many of our financial metrics led by very strong growth in AUM management fees and FRE.
As Mike discussed the breadth of our platform is really on display during the third quarter as we performed for our investors across our significant funds.
With a promising fundraising pipeline continued strong fund performance and our ability to source and find attractive investment opportunities across our groups, we remain very well positioned for the remainder of the year and into the next.
As most of you know we hosted our first Investor day in August and provided some long term financial guidance, we continue to be on track with this financial guidance, including our goal of achieving our target of 500 billion or more by year end 2025, and our expected compound annual growth in our fee related earnings and dividends.
Per common share of <unk>, 20% or better through 2025.
I'll begin with a review of our AUM and fee paying AUM as these metrics provide the foundation for the growth of our management and performance fees.
As of September 30, our AUM totaled 282 billion.
Compared to $197 billion to start the year and up more than 57% versus $179 billion at the end of Q3 2020.
Our <unk> growth for the quarter was supported by over $20 billion of capital raise that Mike described capital raising it was primarily from flagship commingled funds and sizable commitments from our perpetual capital vehicles.
In addition to our capital raising success. The final closing of Black Creek on July 1st added approximately $13 $7 billion of initial real estate AUM, increasing our total real estate groups AUM to over $36 billion.
Our fee paying AUM totaled $172 $7 billion at the end of the third quarter, an increase of 53% from the prior year driven by continued strong deployment and our direct lending alternative credit and special opportunity strategies as well as continued robust capital raise.
The closing of Blackrock added $9 $3 billion of fee paying AUM during the third quarter.
During the third quarter, we introduced a new AUM classification perpetual capital to.
To confirm conform with some of our peers and to provide better visibility on the nature of our along with capital.
Perpetual capital is an active funds with an indefinite maturity and where theres no requirement to return capital upon realizations.
It includes our publicly traded vehicles ARCC acre.
D C K tax our insurance capital and certain other private commingled funds and SMA.
The growth rate of our perpetual capital is noteworthy because it increased 73% year over year, and now totals more than $70 billion or 25% of our AUM.
At quarter end, 88% of our AUM was either in perpetual capital or long dated funds highlighting the stability and durability of our business model. This long term sticky capital was responsible for 94% of our third quarter management fees.
Our available capital sits at a record $85 8 billion at the end of the third quarter up more than 60% year over year.
Our available capital leaves us well positioned with our strong pipelines and creates optionality when we see potential market dislocations.
Management and other fees increased to $467 million for the third quarter, a 53% increase from prior year.
For the third quarter, we reported FRE of $182 $3 million, an increase of 71% over prior year our growth in FRE reflects both continued management fee growth driven by significant fundraising and deployment some benefit from catch up fees, primarily with any cough six as well as continued margin expansion our third quarter FRE.
A 39% is a new record and was approximately 400 basis points higher than the third quarter of 2020, and we remain on track to meet our 45% plus FRE margin run rate by year end 2025.
The third quarter also marks the first full quarter of management fees and FRE from our two recent strategic acquisitions of landmark and Blackberry.
These new groups have already begun to have a positive financial impact for areas for the third quarter Black Creek contributed about $5 million to our FRE. We expect this to ramp up in Q4 landmark also contributed strongly to our FRE with $21 9 million for the third quarter.
We're excited for the progress we've seen in these early days for both of these acquisitions and we expect their impact to continue to grow as we generate further revenue synergies.
We ended the third quarter with $53 billion of AUM, not yet paying fees available for future deployment of 39% increase from the prior year.
That translates into a $488 $7 million of incremental annual management fees, which is approximately 33% of our last 12 months management fees. These management fees are expected to come in at a higher margin compared to our reported margin is this revenue growth is falling expenses already incurred for.
For example, as we raise a new fund that pays off on invested capital our cost to raise the capital cost for the distribution and IR teams our investment teams in our business operation teams are already largely reflected in our P&L.
<unk> driver of our margin expansion, specifically for a more scaled strategies.
Our realized income of $198 $9 million was up 36% largely supported by the 71% year over year growth in fee related earnings after tax realized income per share of class a common stock was <unk> 62 per share for the third quarter up 29% from prior year based on current <unk>.
Activities realization activity is poised to pick up in the next six months compared to third quarter levels.
You can see our strong outlook for future performance income through the impressive buildup in our accrued net performance income, which totaled $731 9 million at quarter end up 127% over the past year on top of this there was an additional $69 billion of uninvested incentive eligible AUM.
That is not yet reflected in this amount.
Overall, our incentive eligible AUM achieved a new record of $175 billion at quarter end, an increase of 61% from the prior year.
I wanted to take a minute to reiterate one of the key points, we outlined at our Investor day involving our European style funds.
Over the past five years, we've been assembling a growing stake of European waterfall false style funds that are building future value through deferred realized performance income across nearly all of our investing groups.
The future value continues to grow as we raise additional incentive eligible capital that is European waterfall style. For example year to date through the third quarter approximately $21 billion of nearly 52 billion. We have raised was in European style waterfall funds, including $6 7 billion in the third quarter alone as we.
Continued to generate strong investment performance in these funds and raise new funds. We believe we'll be able to realize significant future performance income. Once these funds returned capital to their investors typically in the last few years of the Fund's life.
This expected realized net performance income from European waterfall style funds, which is largely not present in our realized income today is expected to become a source of steady recurring and growing realized net performance income beginning in 'twenty 2022, 2023 and beyond.
In summary, our established businesses continue to perform very well with significant dry powder and a very active deployment environment with the completion and first full quarter of our recent strategic acquisitions under our belt. We are excited to further integrate these acquisitions and apply our playbook to use the power of our platform.
To extract the revenue synergies in the coming years.
We have planted the seeds for additional diversification and strong growth in large end markets that we believe should position us very well for the exciting growth opportunities in our industry in the future.
I'll now turn the call back over to Mike.
Great. Thanks Jared.
Our industry has been going undergoing meaningful.
Meaningful transformation and rapid growth driven by strong secular tailwind that we believe are accelerating.
Institutional and retail investors are seeking to increase portfolio allocations to a broader range of strategies across the risk return spectrum and private alternatives are a central focus.
We're seeing increased democratization of alternatives with meaningfully increased retail allocations through multiple channels and we believe that Ares wealth management solutions positions us to lead in this part of the market.
We're also seeing industry consolidation as investors allocate greater wallet share with larger scale managers like Ares and we believe that we're at the leading edge of this evolution and our business is well positioned to drive long term growth and corresponding value for all of our stakeholders.
I want to end by expressing my appreciation for the hard work and dedication of our teams around the globe the.
The amazing growth and investment performance that we've delivered as a direct result of our employees' strong commitment to collaborate.
Work as one team with a shared set of common values I'm also deeply thankful to our investors for their continued support of our company.
And their confidence in us and with that thank you all for your time today and operator, we'd like to open up the line for questions.
At this time.
To ask a question.
Please.
Star then one on your Touchtone phone.
If you would like to withdraw your question. Please press Star then two.
<unk>.
First question will come from Alex Blaustein of Goldman Sachs. Please go ahead.
Hey, Thanks, good afternoon guys.
So Mike maybe just picking up on the last point you made around the area of wealth management solution business that you've established curious to get your thoughts about sort of what this business and what really <unk> product suite.
Sweet sorry in the wealth management channel going to look like two to three years from now so they've got Black Creek on the real estate side. So that's one vertical but how are you thinking about private credit so outside of <unk>. What else you guys could potentially do there secondaries et cetera, just trying to get a more holistic view of your vision for that part of the model.
Yeah sure. Good question, Alex So one thing I do want to highlight is.
The formation of wealth management solutions is really not.
<unk> revolutionary change here or what we're really doing is bringing together our already well established private wealth and high net worth distribution.
With the Black Creek.
Salesforce and wholesaling capability and by doing that what it allows us to do is just expand the product set go broader into the wires and the wealth management platforms that allow us to go deeper into the IBD and RIAA channel.
And allows us to think about our offerings on a more global and holistic basis. So this has been in the works and you can see that we have.
<unk> already had great success in terms of the fund raising.
And both our institutional and retail products Youre right today, the core products in the non traded part of the market are the two Black Creek.
Non traded Reits, which you saw in the quarter had great success fund raising and performance and are accelerating.
And I would expect given our brand and the resources that we're bringing to the table, but that growth will continue.
Also had very good success on the private credit side with a diversified credit interval fund.
And believe that we're probably one of the largest diversified credit funds and in the channel as well.
In terms of where the product can go I think you should expect to see a host of new products across the platform has a lot of the Big Bank partners and channel partners similar to what we're seeing on the institutional side are going to shrink the number of GP relationships, they have and do more with fewer brands.
So what that would likely mean for us is something in the secondary space leveraging the capability set that came with the landmark acquisition will likely have something in and around the real asset space in the infrastructure space leveraging that capability.
Our capability set we have there.
Given the strength of our private credit platform I think there's an opportunity to explore various BDC structures given the ARCC track record that we have in the traded markets and so on and so forth. So I think youll begin to see us and others put together a product set globally that is offering a cross section of.
Pretty much everything that we're doing.
Across the platform that will take some time I think we have a real head start because they're not like you can just flip a switch and create the product create all the licenses you need to get all the selling agreements build the technology. So that there is a lot that goes into servicing this channel, but that requires a significant amount of investment that we've already made.
Great Alright, well, we'll look forward to seeing that.
The second question I had for you guys. Just a numbers question around Black Creek, so $800 million really strong flows in the quarter could you expand on maybe just the types of platforms or geographies, where.
These flows have come in is this kind of anything.
Anything, particularly unique about the quarter or that's a fairly good run rate, we should be thinking about and then with respect to performance at <unk> Creek to your point, Michael So really really strong I think in the mid to maybe high teens year to date, how should we think about the performance fee from Blackberry to Ares for Q4.
Are you guys going to characterize it as our FRE or not similar to sort of peers. I think you only get half of it because you only owned the asset for the half year, but just wanted to flesh that out.
Sure So I'll.
Maybe to answer the first part which is it's pretty broad based coming from different platforms and again, what we bring.
The table together through the formation of wealth management is.
Deepening of of the sales force and a deepening and broadening of the relationships with the different channels across IBD, RIAA and and the wires and so I would expect the growth to continue we've seen it accelerate prior to our ownership and now under our ownership given the.
<unk>.
Power of our brand and the platforms, we're seeing it accelerate.
The performance, obviously helps and.
It's probably no secret that industrial real estate and industrial logistics is a.
In demand attractive part of the market just given the secular trends there. So I think that's a driver not just our performance, but also of <unk>.
Demand.
And then I'll, let Jared chime in here, but we're thrilled with the FRE contribution.
Obviously, you can kind of.
Look at what we acquired the platform for and what they are delivering and we would expect the fr re ramp to continue.
Similar to a lot of our other funds.
We obviously get paid as we deploy there so as we continue to invest we would expect to see that FRE trajectory continue.
Also have lumpy fees.
In terms of.
Disposition acquisition development that will also start to work their way into the P&L and then lastly, yes in Q4 similar to a number of our peers, we would expect to see performance fees.
Find their way into the P&L, you're correct in pointing out that theme that we've only owned them for a half a year that we would.
Get credit for half of those are post closing.
And consistent with the existing.
Existing treatment by our peers, we would be taking that into FRE.
Yeah, that's right, Mike I think we don't see any.
Any real difference in those types of fees that we will be earning ultimately than what our peers are and at this time.
So the clarification would be appropriate.
Alright, Thank you very much.
Thanks.
The next question is from Jerry O'hara of Jefferies. Please go ahead.
Great. Thanks.
Yes.
Picking up on Mike some of your comments as it relates to sort of exploring other products and distribution channels with respect to a landmark partners clearly secondaries as one of the fastest growing areas of alternatives, but perhaps you could give us a little extra color or context around that I think we thought we'd appreciate it.
Sure happy to Jerry so.
And maybe just to quickly remind everybody landmark is one of the.
Pioneers of the secondary space and have been growing quite nicely prior to.
The acquisition.
And have done a good job broadening out the product set away from what I would call traditional LP led private equity secondaries into the GP side of the market, but also away from P. M.
I think about growth in landmark in a couple of ways. One is a continuation of this expansion of the P/e business.
Towards more GP led and structured solutions.
Aries brings a very unique synergies to the table. When you put these two businesses together just given the breadth of our global GP relationships.
And our direct investment capabilities. So as you begin to explore GP directs and things like that are private equity capabilities and diligence capabilities I think we'll be meaningfully value add to that expansion.
Two would be to grow the business away from P E into real estate infrastructure and credit landmark already has a meaningful running head start in doing that they're a market leader in the real estate side of the business. We're in the market now with our ninth fund and have.
Demonstrated really strong performance, there, which you can see in our filings and we recently closed our second infrastructure fund which is.
Also off to a great start so.
Turning to expand that part of the business.
Extend our leadership position in real assets, and then probably not surprisingly given our broad credit franchises to look for ways to leverage that into credit secondaries to would be to globalize. The business secondaries. Historically has not just been private equity centric MLP centric, but it's been north American centric and given our global.
Footprint I think that there's an opportunity for us to broaden out geography.
And that's something that we'll explore and then to your point as well would be product extension, which is to look at ways to fund the growth opportunity here not just with your traditional co mingled institutional fund, but look at a number of potential retail opportunities and partnership relationships that scale.
And to the growth opportunity that we see.
So a lot to do already off to a strong start we're three months into the integration couldn't be happier with the way that the teams are collaborating fundraising momentum is good performance has been strong and so a lot of that playbook as we said in the prepared comments, while it's early as we're executing well.
Okay. That's helpful and then and then one maybe for Jared.
Perhaps a bit technical or maybe even a reminder, but can you give us a sense of.
The difference between the total AUM and fee paying as it relates to Black Creek, I think I heard 15 billion as of.
Current.
And should we expect that to sort of come through over time or how does that work structurally.
Some of it as a result of the fees being paid on NAV as opposed to total assets. So that's where a lot of your your difference is going to be and then there is some deployment there as well in the AR and the funds that are not the non traded Reits.
Okay helpful. Thanks for taking my questions guys.
Sure. Thanks, Jeff.
The next question will be from Robert Lee of <unk>.
Please go ahead.
Great Good morning, or good afternoon, thanks for taking my questions.
A question actually on the insurance and the speed is so.
Obviously talking a lot about the wealth platform and the you know.
So origination you know fund raising that can go through that but can you kind of bring us up to speed and it's relatively small but.
Kind of if I remember correctly when you first.
Our guidance for that business or we're targeting that that acquisition one of the attractive features was its origination capability.
So kind of what's your your thoughts about the ability of that platform now are the leverage points you may have to kind of accelerate growth of the of.
The insurance business.
Yeah. So I think you had you have to think about it organically and inorganically. So let's put inorganic to the side for a minute, but hopefully folks recognize just given the market backdrop that there should be a number of acquisition opportunities to scale that business over time, but if you look at the.
<unk>.
You then have to break it down into our reinsurance business speed of re and our life and annuities business speed of life and both of those have strong organic growth opportunities as well.
The reinsurance part of the business is a little farther along.
In terms of its development, having started really in earnest with the acquisition of <unk>.
As we talked about at our Investor day to day, taking on no new relationships. There, we're doing about $1 billion of flow business and we would expect that to continue per annum.
And then on the life and annuity side.
We have all of the pieces in place the servicing and distribution capability that you articulated Rob is in house now and we would expect to begin ramping that organically early in 2022.
And you're right prior to the acquisition that platform without our brand.
And products that was doing roughly $2 billion a year of organic origination. So we would expect to do that plus so without growth beyond what we see today and we talked about this at the Investor day, the combination of the reinsurance business in the annuities business right now would probably have us be.
Run rating about $3 billion per year of of.
New origination and we hope we can do better.
Great and then maybe as a follow up I'm just kind of curious I mean, you have in Asia, you have for Dante in Australia that Sumitomo relationship I'm just wondering.
I'm wondering if there's anything you could point to or think about and how that's maybe.
0.2, how that maybe helped you start to accelerate our fund raising in Asia.
Yes.
I'm glad you pointed that out as we talked about with both of those it's still early days, but we are long term bulls on the opportunity to invest and raise capital in that market.
We are raising funds through the <unk> relationship and similar to what were experiencing domestically.
That fund raising is scaling.
In terms of the Sumitomo relationship were working on a number of initiatives that's been slower to develop as we would expect but continue to believe that there's an opportunity to bring meaningful products into that market as well so.
We're making good progress, Rob, but we'll kind of start talking about it more specifically when the numbers become a little bit more material.
Okay, great. Thanks for taking my questions sure. Thanks, Rob.
Next question will be from Michael Cyprus of Morgan Stanley. Please go ahead.
Hey, good morning, Thanks for taking the question I wanted to circle back to the capital deployment $20 billion in the quarter quite an impressive number you guys put up.
Certainly substantial growth versus a year ago I was hoping you could maybe elaborate on what's changed in the business and the industry that you are able to put up such a large level of deployment and as you look out over the next 12 months is this $20 billion figure here that you had in the quarter as something that could be sustained how should we think about the path forward for deployment.
Yes, it's a good question, Mike I would expect that it could be and I'd refer people to our Investor day presentation, just to look at how not just our AUM, but our deployment has scaled over time relative to the resources that we're putting against that deployment, so not surprisingly as we're adding more.
People, adding more product, adding more office locations.
Broadening the product to attack different parts of the market.
The deployment is scaling in the aggregate, but it's also scaling more efficiently, meaning we're delivering more deployment and more AUM per investment professional as we scale. So there are economies of scale.
And Thats also part of it I think what we have found and we've spent a lot of time talking about this in the context, particularly of our direct lending and private credit franchises is as we get larger deployment in many respects is getting easier and that's because you create meaningful origination advantages.
<unk> ability to attract and retain people the value of incumbency and our portfolios, where we're seeing 50% to 60% of deal flow coming from existing relationships and as our other businesses are scaling now in real estate and for a P et cetera, we're beginning to see that same benefit of scale.
In terms of the investments, we can make in deployment and the ability to write larger larger check sizes. So.
I would expect it to continue the markets are particularly conducive to good deployment here just given the fundamental strength in the economy and and liquidity in the markets.
You may see one market slow and another ramp, but I don't see anything that's going to take us off this type of pace.
Great and just as a follow up question, we're seeing some firms in the industry acquire these platforms with direct origination capabilities and asset based finance consumer finance broadly just the non sponsored marketplace in general just curious how you're thinking about that as an opportunity set for Aries and to what extent could it make sense for Ares too.
Acquire these sort of asset based and consumer finance platforms.
Yes. So we are we are already doing that.
And it's a good it's a good point because a lot of that opportunity really resides in and around our alternative credit insurance and opportunistic credit franchises all of which are large addressable markets, which is also driving the deployment back to your first question.
Depending on the end market will really drive whether we are investing in it as a control investor or investing in it as a noncontrolling investor with a capital relationship and we're doing bulk so we recently announced as an example.
A strategic investment into a <unk> business through our speed.
In order to continue to drive asset sourcing. There. However, we also recently announced the growth in our net lease business in our alternative credit franchise that will be owned and controlled so we are doing a lot of that.
It resides in different parts of the business, depending on what the asset classes and what we think the durability of the asset opportunities.
Great. Thanks for taking my questions.
Sure.
Next question is from Kenneth Lee with RBC. Please go ahead.
Hey, Thanks for taking my question.
Just one on the perpetual capital.
How do you think about the growth rate going forward and specifically the growth rate relative to the.
AUM. Thanks.
I'm sorry can you broke up can you say that again.
Yes, just.
Question around the perpetual capital.
How do you think about the growth rates going forward and specifically just relative to the rest of the AUM.
Yes. It is.
Ben.
The good news for US is everything is growing at a high rate.
Our perpetual capital has been growing probably modestly faster.
And now with the Black Creek.
<unk> complex on our platform and the investments that we're making and we'll continue to make in wealth management solutions I would expect that to continue but.
It's something we laugh about over here because when the whole platform is growing at the rates that it's growing it's tough for somebody that does stand out but the demand we're seeing in that channel is pretty pretty significant.
And when we talk about perpetual capital as Jared mentioned on the call.
It includes our BDC and our mortgage REIT, which have turned back on and have been raising capital again after five plus years of not raising capital. It includes non traded Reits, which as we talked about are scaling at it includes the insurance business, which is scaling as well.
So it's growing faster but.
The whole platform is growing it's not as though it's.
It's going to stand out as disproportionate.
Gotcha very helpful and just one follow up if I may.
In regards to the potential performance income you could see from the European waterfall style funds, you mentioned seeing it potentially in that 2022, and 2023 timeframe Wonder if you could just give us a sense of the potential trajectory of when you might see that performance income and.
How it could be distributed across the various businesses. Thanks.
Yeah, why don't I can hey, Jared just maybe contextualize what.
Why we're talking about it before we get into the numbers I think would just be helpful to reorient people to what it is and how it is going to come in.
Yes sure go ahead Mike.
Okay.
So just at a high level hopefully people. Appreciate the reason we're talking about is when you're when you're dealing with European waterfall.
Particularly European waterfall for credit funds. Unlike an American style, where you are generating performance fees and carry when investments are realized throughout the funds life and a European style fund you're effectively getting all of it at end of fund life. Once the investors have gotten a full return of cash.
Capital.
Their prep return and so if you just think about all of these credit funds that are generating.
Disproportionate amount of their return through income the minute you return investor capital and get through the hurdle that performance income just starts coming in on a regular basis quarterly given that Youre now at end of fund life, but also just given that you don't necessarily require <unk>.
Sales and monetization within the portfolio to drive performance income. So what we're trying to highlight is while it will be performance income our expectation is given the stable of funds that we've put together there you all will begin to experience it as a much more predictable stable source of performance income.
Just given the nature of the underlying assets.
And I think as you look out and we detailed this.
In the Investor Day presentation, really we started to raise a meaningful number of these type of funds in 2017 and as Mike talked.
Talking about it's closer to the end of the life of those funds that you start to see that recurring monetization.
That generally is in that six to 10 year timeframe. So when you take 2015 and you look out 2022 2023 is when they start to enter that mode, where they've they've paid back that return to the investors and they've reached that European waterfall level.
We estimate we had about $1 $5 billion of European waterfall carry related to the funds that existed there.
That exists today and that number has increased slightly based on what we've raised this quarter and continues to increase as we raise more European waterfall style funds.
But we believe that that meaningful number is really going to start in that 2022, 2023 range and continue to build up from there into a recurring number that is easy to see an estimate but is not captured today in our realized income.
Got you very helpful. Thanks again.
Thank you.
The next question is from Adam Beatty of UBS.
UBS. Please go ahead.
Alright, Thank you and good afternoon, just wanted to follow up on the performance fee income.
Kind of the ramp youre seeing from European waterfalls.
In the past, you've said or at least suggested that.
As shareholders, we should sort of focus mainly on FRE. That's really how are you going to peg the dividend et cetera and the.
Realized income from performance fees would be used to invest and build fr.
FRE capability. If you will I guess those are my words, but just wondering how you're thinking about you know the.
<unk> step up in investment capability, and what kind of opportunities you might be anticipating for the coming years.
Yes, I understand the question correctly I don't I don't think that we anticipate given this European waterfall kind of wave that's going to start coming through the company two years from now or.
18 months from now that we're going to change our capital management policy.
We will continue to drive growth in FRE.
The dividend to that growth in FRE consistent with the guidance that we've put out and use our performance income to reinvest in the fee the fee engine.
I think we're going to have to take a look when we get into that environment, where the investment opportunities are but our expectation is that we're going to maintain our our capital philosophy that we laid out many years ago. We think it's working and it's the best way for us to deliver sustainable growth over a long period of time.
The reason, we're highlighting it though is I think the market my own personal view is still.
Grappling with the difference between fee related earnings and realizations and how to contextualize realizations with accrued performance fee.
Et cetera, et cetera, and I think thats something the market needs to evolve this is going to be yet another nuance and understanding that not all performance income is created equal.
In these businesses that we run the performance income is more diversified supported by broader portfolios and supported by yield as opposed to a private equity portfolio that is requires monetization activity and is going to be lumpier.
So I don't think that we're going to change the way, we're thinking about balance sheet management and investing but we'll have to cross that bridge when we get to it and see see how it comes through.
Okay Fair enough you got it thanks, Mike and then just turning I think I heard in the prepared.
You mentioned sort of increased appetite for <unk>.
Larger from larger corporate issuers for direct lending and I guess, that's been a trend over the private credit you know the history of private credit and starting with a smaller issuers, but just wondering whether there was something you know in terms of an inflection point.
That's driving that.
And what you're seeing in the underlying dynamics and also whether that might open up additional opportunities just by virtue of the scale of the issuer I don't know in terms of you know across the capital stack her or co invest or things like that.
Sure.
So yes, there has been a change in the market that's been a combination of folks like us accumulating enough scale to deliver these types of size solutions into the market.
And it's come with what I would say maybe a comfort.
With an awareness of the value proposition that the private markets can deliver to a company versus the public markets around speed of execution certainty of close flexibility in structure and in terms of ability to scale and grow if youre acquisitive confidentiality, if you're public or you're doing it.
Take privates that there are a lot of non economic reasons why people borrow now in the private markets versus the public markets.
I think Kip has talked about this.
Quite well over the years and then on the ARCC earnings call as well, but you also have something going on in the liquid markets, which is the leveraged loan and high yield markets are moving to scale and as they move to scale their freeing up.
Kind of a lower end of their market for the private markets too to take share.
And the big drivers of the use and the private credit space have been private equity so as private equity.
Dry powder has increased.
And as private equity.
Been a disproportionate user private credit Youre, just seeing larger private equity deals getting done outside of the loan and high yield market. So there has been a shift in the market I would expect it to continue.
We've historically talked a lot about these windows of opportunity that open up when the markets get volatile when the banks are derisking or the syndication markets are little wildly that we can come in with a private solution thats attractive it feels to me and.
Kipp feels differently. He's on the line that that's still an opportunity for us, but there's probably a more sustainable.
Opportunity set for the private markets today than there was in prior cycles, just given the maturation of the industry.
Yeah, I'd agree with you Mike its Kevin.
Perfect. Thank you guys much appreciate it.
Sure. Thanks.
The next question comes from Chris Kotowski with Oppenheimer. Please go ahead.
Yeah. Good afternoon. Thanks.
Just wanted to understand your comments about the European waterfall Kerry.
That amount.
I am assuming that amount is captured in the $732 million net of crude that we see on page 22, It's just that it will come in kind of more linearly.
As opposed to like right.
We laid this out if you go back and look at the slides in the Investor Day, that's actually not included today in that 731 that is based on the funds that exist today, what the ultimate anticipated carried interest would be over that time and those European waterfalls, where you're referring on page 22 is.
The unrealized position today, but we have the ability to look at those funds and then understand the yield of the portfolio and expectations on exit and that's where that that $1 5 billion comes from.
Okay, Alright got it and then secondly kind of a modeling question.
It's just if you look at the expense level in the operations management group that kind of bumped up from it had been running in the mid sixties to low seventies.
Bumped up to 94 is that a function of the.
Acquisitions, and Thats, a new normal now or was there something unusually lumpy in that.
That's right. It is a function of a full quarter of landmark, which I'll remind everyone was the June 1st acquisition. So this was our first full quarter with them than our first full quarter of Black Creek as well.
Just a slight increase in travel and some marketing and other items as we start to get back to normal.
Okay, but we should kind of think of this as a normal level.
I think that's fair.
Okay, Alright, that's it for me thank you.
Great. Thanks.
And this concludes the question and answer session. So I'll now turn the call back over to Michael.
For any closing remarks.
No I don't think we have any we appreciate everybody spending time with US today, we're just really happy with where things are and the strength of the quarter and look forward to speaking to everybody again.
Next quarter and thanks for your support.
Ladies and gentlemen, this concludes our conference call for today, if you missed any part of today's call an archived replay of this conference call will be available through November 24th 2021 by dialing 87734, 475 to nine and to international callers by dialing one.
For 123170088 for all replays. Please reference conference number 1015984 for an archived replay will also be available on a webcast link located on the homepage of the Investor resources section of our <unk>.
Right. Thank.
Thank you all for attending today you may now disconnect your lines have a great day.
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