Q4 2022 Ares Management Corp Earnings Call
Hello and welcome to Airy's Management Corporations fourth quarter and year and earning conference call. At this time or participant, I'm in listen only mode. As a reminder, this conference call is being recorded on Thursday, February 9, 2023.
I will now turn the call if it's a call Drake, head of public markets, investor relations at Aries Management. Please go ahead. Good afternoon and thank you for joining us today for a fourth quarter at year end 2022 conference call. I am joined today by Michael Eriegating, our Chief Executive Officer and Jared Phillips, our Chief Financial Officer. We 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 violence.
Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements.
Please also note that past performance is not a guarantee of future results, and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any area's fund.
During this call, we will refer to certain non-GAF financial measures, which should not be considered in isolation from or a substitute for measures prepared in accordance, but generally accepted counting principles.
Please refer to our fourth quarter in four year earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comable GAAP measures .
Note that we will plan to file our 410K later this month.
This morning we announced that we declared our first quarter common dividend of 77 cents per share of its class A and non-doting common stock.
Representative an increase of 26% over a dividend for the same quarter a year ago.
The dividend will be paid on March 31, 2023 to holders of record on March 17. Jared will provide additional color on the drivers of this significant increase in our quarterly dividend later in the call. Now I'll turn the call over to Mike Lairgetti who will start with some quarterly and your end financial and business highlights.
Thanks Carl and good afternoon. Hope everybody's doing well.
Despite significant volatility and uncertainty in the markets throughout the year, we generated exceptional growth and strong performance across our financial and operational metrics.
Year over year, we grew 32% in management fees, 40% in fee related earnings and 30% in the after-tax realized income per class A common share.
while also delivering a strong year of fund performance for our investors.
This financial outperformance during challenging markets isn't new to Aries, as our management fee-centric business model and flexible investing approach have enabled us to accelerate our growth during past turbulent market cycles and recessions.
The strong relative performance of alternative investments last year compared to the publicly traded equity and fixed income markets only further reinforces our belief in the benefits of private market investing. Investors remain significantly under allocated to alternatives which represent just over 10% in total global AUM.
With a robust fundraising pipeline and our expanded investment capabilities heading into 2023, we believe that we're well positioned for continued strong growth as we expect investors to increase their alternative allocations.
Well, 2021 was a transformational year for our platform with multiple strategic acquisitions. 2022 was the year of integration and platform building to position the company for future growth.
During the year, we added approximately 450 professionals with 150 in origination and investing and 85 in fundraising and wealth management, including new senior wealth management heads in Europe and Asia Pacific.
We also spent the year enhancing our retail platform through product expansion, growing our distribution capabilities, and deepening relationships with strategic distribution partners.
Our affiliated insurance business, Aspida, began directly originating annuity contracts in late June and finished the year with significant growth and momentum.
We also continue to expand our relationships with existing and new institutional investors and experience a significant increase in our institutional strategic partnerships.
For the year, we added over 100 new institutional investors while seeing over 90% of inflows coming from existing investors, either through RE-OPS 4, commitments to new products.
At the end of 2022, nearly 90% of our AUM was from investors that held multiple funds managed by Aries.
We ended the year with $352 billion in AUM, an increase of 15% from $305.8 billion at the end of 2021, driven primarily by fundraising of $57 billion, including more than $12 billion in the fourth quarter.
Although we didn't have many large, comable funds in the market last year are fundraising benefited from a growing base of capital from non-campaign fund sources.
including our perpetual funds, certain managed accounts, and other smaller funds.
At that point, of the $57 billion of fundraising in 2022, over 40 billion was capital raised from outside of our 20 largest institutional comigo fund families.
We also continue to innovate and offer new strategies to our investor base.
For example, more than 40% of our fundraising last year was from new strategies or products that didn't exist five years ago at Aries.
During the fourth quarter, we held notable fund raises, including a first close on our fourth U.S. opportunistic real estate fund of more than 1.4 billion.
And a final close on infrastructure debt fund five, which reached approximately $5 billion of committed capital, including related vehicles.
We believe that our infrastructure debt fund fives is the largest infrastructure of debt fund ever raised and is a testament to our leadership in that segment of the market.
Also, our non-traded BDC ASIS raised $840,7 million of equity commitments in a private placement in November through January and closed on a $625 million leverage facility.
While we experienced a slowdown of net inflows into our two non-traded REITs, flows remained positive with a combined $440 million of gross quarterly proceeds inclusive of our 1031 exchange program versus $157 million of quarterly redemption requests.
We believe that are all weather, careful investment approach.
Lower use of leverage and sticky capital within our 1031 exchange program benefits our fee-paying AUM.
In addition, we're still growing the distribution capabilities around the non-traded reefs.
In December , we added a second large wirehouse for distribution, and we expect to add two or more wirehouses or private bank relationships for our suite of retail products in the first half of this year.
We anticipate additional inflows from these new relationships over time as we continue to ramp our sales efforts.
We are firm believers that the long-term growth opportunity for alternative products in the retail channel will be robust.
Retail investors are meaningfully under allocated to alternatives compared to some institutional investors and key allocators across the retail space are looking to meaningfully expand their exposure to alternatives.
Over time, we intend to offer drawdown and evergreen style strategies across our primary asset classes suited for both mass affluent and high net worth investors.
As you may recall, we didn't expect 2022 to be a record fundraising year for us without many of our largest fund families in the market.
For 2023, driven by the recent launch of several of our largest commingled fund families, we believe our aggregate fundraising will be well in excess of last year's and will approach our record in 2021 of $77 billion. In the aggregate, we expect to have approximately 30 commingled and perpetual life funds in the market this year.
including seven of our ten largest institutional co-mingled funds.
We're observing a flight to larger, higher quality managers as investors are consolidating their allocations with preferred managers.
Not only does this scale benefit us in fundraising,
But it could enhance our competitive advantages as other players have less capital to deploy.
As an example, late last year we launched our 6th European Direct Lending Fund and most of the predecessor fund largest investors are working towards making commitment in the first close.
We expect to have a substantial first close in this fund in late Q1 or early Q2.
We also recently launched our third U.S. Senior Direct Lending Fund and expect to see similar demand for that fund as well with a first close slated for the second quarter.
The total capital for the previous vintages for these two European and US direct lending funds was just over $30 billion combined, including fund leverage.
Additionally, the second vintage of our alternative credit fund is in the market, and we anticipate it first close in late March or April .
As a reminder, our alternative credit strategy deploys flexible capital focused on large, diversified portfolios of assets that generate contractual cash flows.
The Fund carries a unique performance fee structure where 10% of the carry, half from the investment team and half from Aries, goes towards charitable initiatives tied to global education, to fighting global hunger, and the Aries Charitable Foundation.
Initial investor engagement has been very active across all three of these large private credit funds and we expect strong demand for all of these products.
We recently launched fundraising for our seventh corporate private equity fund, which we believe is particularly well-suited for the current volatile market environment due to the team's flexible approach and ability to invest in distress for control investments in addition to traditional bi-out transactions.
Turning to deployment.
Despite the lower overall transaction activity, our market share gains and private credit continue to drive strong aggregate investment activity across the platform.
In Q4, we deployed 21.8 billion of capital, representing a 19% increase compared to the third quarter.
On a full-year basis, we deployed $79.8 billion, which was flat compared to the $79.7 billion we invested last year.
which we believe is pretty remarkable given the slowdown in overall de-lectivity year-over-year.
This drove our fee-paying AUM to $231.1 billion, a 23% increase compared to last year.
We continue to see very attractive investment opportunities across our private credit funds, with all in yields and fees on first-lien direct loans of 10-13% with Good Covenant Packages.
an opportunistic real estate equity where we just held a first closing in the fourth quarter. We're beginning to see a small number of investment opportunities come to market driven by liquidity pressures.
In our PE business, our special opportunities team has been active with over $650 million deployed in the quarter in a mix of rescue capital, enterprise value enhancing transactions, and distressed or distressed public credit purchases.
In our secondaries business, we're seeing a growing number of LP and GP led opportunities as certain LP's seek liquidity and fund sponsors seek to accelerate liquidity into legacy fund vehicles.
Overall, among our many strategies that can take advantage of constrained liquidity in the market, we're seeing more activity for our private capital solutions.
Going forward, with nearly $85 billion of available capital and several large first closes for our large commingled products in the coming months, we expect to have a strong capital base to take advantage of the market opportunities for our clients.
I mentioned earlier that our affiliated insurance platform is gaining momentum after launching the annuity origination business in June .
In the second half of 2022, a speed of nearly doubled its AUM to $6 billion, up from $3.6 billion in June , including an additional $1.4 billion in the fourth quarter.
We're now building an attractive portfolio that sets without the issues associated with a legacy backbook.
As we seek to raise additional third party capital, we expect to scale our affiliated insurance fund further in the coming years.
Our portfolios are generally defensively positioned as we head into the new year.
With nearly 60% of our invested assets in floating rate credit, we continue to benefit from rising interest rates.
And these assets are generally in the top half of the capital structure, which further enhances our positioning.
In our U.S. senior pain direct lending portfolios, we continue to see solid fundamentals, low defaults, and resilience in our credit metrics with weighted average loans to value with year end of 46% and 49.5% respectively, as well as continued strong EBITDA trends.
with last 12 months comparable growth of 9% for both the US and European portfolios.
Our global real estate portfolio continues to see strong rental growth and high occupancy rates with our highest conviction sectors of industrial and multi-family, which comprises approximately 77% of our gross assets.
In addition, other adjacent high-conviction sectors such as single-family rental, self-storage and life science accounted for another 11% of gross assets.
Our non-traded REITs reporting multifamily rent increases on new leases and renewals of 13.1% and 11.6% respectively.
In our AI REIT industrial only portfolio, 99% of our space is leased and during the year over 10% of the portfolio issue new or renewed leases at an average increase of 47% growth above the comparable or previous lease rate.
Our global real estate portfolio overall continues to be underweight in office with less than an 8% allocation across the global portfolio and most of our exposure in the US is in the real estate debt that's largely senior in the capital structure.
Our private equity groups portfolios continue to perform with year-over-year EBITDA growth of 9%. Our positions in more defensive sectors like health care, business services, and light industrials.
We believe that the strong secular growth that we continue to experience across our business is ultimately a result of our strong and consistent performance. In 2022, nearly all of our strategy composite returns outperformed comparable public markets for the year.
And now I'd like to turn the call over to Jared for comments on our financials and additional details on the performance of our funds, Jared.
Thanks Mike. Good afternoon everyone. Thank you for joining us today.
I'll begin with the review of the fourth quarter in full year. Then I'll provide an update on our outlet for 2023 and beyond.
This might say that we experience strong growth in nearly every financial metric, including management fees, derelated earnings, realizing income, AUM and FDA AUM for both the fourth quarter and the full year when compared to the prior year.
In 2022, as we've seen in past all of them,
markets. ARIES' management-d-centric and FRE-rich business model delivered strong results despite a turbulent economic environment.
Starting with our revenues, our management being increased 23% from fourth quarter and 32% from the full year, during primarily by the strong to one of our best at Apple.
Our management based ability remains a key differentiator for our business model and enables us to better manage short and long-term market dislocations.
As of year, 95% of our men's disease were derived from either perpetual capital or long data funds.
which reduces the risk of significant reduction even during severe market movements.
Other fee income was approximately $25 million for the fourth quarter and was just shy of $95 million for 2022.
of 11% and 90% respect for each.
Other see-income spread pretty evenly among capital structuring, the origination administrative fee of the credit fund.
development leasing and acquisition fees in real estate, and retail distribution revenues.
For the full year 2022, we generated $239.4 million.
The fee-related performance revenue.
FRPR.
compared to $137.9 million.
for this four-year 2021.
The strong contribution from FRPR in 2022, of which about 94% was recognized in the fourth order, reflects $164.3 million in annually measured performance income.
from our two non-traded REITs.
And $71.5 million in performance income from nearly 30 perpetual life credit funds that are eligible for consent of D-Pamper.
As a reminder, the large increase in the non-traded REITs FRPR was partially driven by the fact we received 100% of the FRPR in 2022 versus only 50% in 2021 as we closed the acquisition of Blackselling.
As our minor, the large increase in non-tradable rates FRPR was partially driven by the fact we received 100% of the FRPR in 2022. There's only 50% in 2021 as we close the acquisition of Black Reade on July 1st of 2021.
Our underlying basis funds that generated FRPR continues to expand as AUM and these funds increase more than 35%
to $22.4 billion during 2022.
Looking forward to the outlook for FRPR from our non-traded REAPS, this hearted interpreting compared to our credit funds.
We think it's reasonable to expect growth in FRPR and accredite funds in 2023 due to the trajectory of interest rates as we anticipate earning higher base rates and see income above extra rates. Our real estate funds will require some modest appreciation to mirror our rates and therefore the related future FRPR is harder to estimate.
As it relates to our FRE, our FRPR margin, when considering the associated compensation expense, was 37.6% in 2022.
Our margin on FRPR should remain below 40% due to our contractual compensation structure of 60% paid to employees and some associated payroll taxes.
But low margin on FRP are negatively impacted, our overall FRE margining Q4.
It was still very accreted to our FRE during the fourth quarter, in terming $85 million to FRE with 64 million from real estate and 20 million for credit. For the fourth quarter, FRE totaled $335.7 million, and increased its 33% from the fourth quarter of 2021, driven by higher management fees and FOPR.
For the year end of December 31st, 2022, I far retotaled $994.4 million.
an increase of approximately 40% from the prior year.
FRE account for more than 87% of our realized income.
Upcoming approximately 80% in 2021 and 74% in 2020.
or authority and rich-ranked or a key differentiator for every.
And we believe they add consistency and predictability to our overall earnings.
This can also be seen by a compound annual growth rate in FRRE over the past three and five years of 42% and 36% respective sectors.
RF audition region CARCHEuster for the 4th Corency
So, it will 39.9% and 40% for the full year. Excluding FRPR, which has a lower margin due to the compensation of regulated taxes that I previously mentioned, our margin was 40.6% for the fourth quarter and 40.2% for the full year.
We continue to be on track to achieve our goal of 45% run rate FRE margin by year and 2025, even including the margin drag from FRPR.
Regarding the pacing of our margin expansion towards our 45 percent target in 2025, we have now made many investments in front and back office personnel in preparation for the upcoming fundraising cycle.
The higher staffing levels dampened our margin expansion in 2022, the full year effect of these hires will carry over into 2023. As we raise in the bullet gap, it will from these large, connegold funds coupled with an expected slowdown ahead down growth. We expect to see margin growth resumed in the back after 2023 with a larger step up in 2024 and 2025.
Our realization activity increased in the fourth quarter was realized net performance income to $91 million. It increased at 10% over the fourth quarter of 2021.
Net performance income, including $36 million from our credit group, largely from European waterfall distribution and that side of these from our U.S. and European direct landing parts.
Our private equity group also realized $33 million of net performance income largely related to EU Waterfall distributions per face-off point.
Reaud has been come to the fourth quarter to a record $419 million of 23% from the fourth quarter of 2021.
From fully year, realize income exceeded 1.1 billion.
a 28% increase from 2021.
After tax-relivening on per share of class A comments back was a dollar and 21 cents for the fourth quarter of 42 percent versus the fourth quarter of 2021.
For the full year 2022 after tax realized income of $3.35 per share of Class A stocks was up 30% vs 2021 and exceeded our 2022 dividends.
$2.44 by 37%.
As a year end, our AUM, so about $352 billion, compared to $341 billion for the third quarter and $306 billion as a year end, 2021.
Our feed paying at UN, so $231.1 billion a year end, an increase of 23% from year end 2021.
Our growth in fee-paying AUM is primarily driven by meaningful deployment across our U.S. and EU direct lending, special opportunities, and alternative credit strategies. We've been managing fees on invested capital.
Looking forward to 2023, we believe we are well-positioned to take advantage of further volatility in the markets and continue growing our fee paying AUM. Our available capital is $85 billion as a VRM representing significant future earnings potential. We expect our drive-out will increase as we enter a period of accelerated fundraisement.
$41.8 billion dollars of AUM not yet paying fees available for future deployment, which represents over $400 million dollars in incremental potential future management fees.
Are incentive eligible AUM increased by 11%?
from the end of 2021 to $204 billion. Of this amount, $63.9 billion was uninvested at year end.
And the fourth quarter are net accrued performance income, so that $832 million. The client is $56 million from the previous quarter, due to 75 million of net realizations.
On this 832-money to the net accrued performance income in year-end, approximately 65% was in European style water platforms.
For the full year, our net accrued performance income increased by 3% versus the prior year.
As we highlighted in our investor day, we have a substantially growing number of European-style waterfall funds that accrue performance fees that pay the vast majority of their performance fees in the final years of the fund life.
For example, European Waterfall Style Funds co-owned nearly $100 billion in the Senate's eligible AUM at your F.
In 2022, we realized $114 million in net performance income from European and waterfall style funds, which represented 79% of the total net-realized performance income for the year. Importantly, we expect net performance income from European style funds to continue to account for the significant majority of our total net...
$300 million in European-style funds that were passed through their investment period and expected approximately $40 million to be recognized in the fourth quarter.
In the fourth quarter, we actually recognize 67 million of performance income from European style funds. Now at year end, due to the interest generating nature of many of these accounts above their hurdle rates, we still have more than $300 million in European style funds past their investment periods.
We now spec and that realize performance in town from European style funds of approximately $100 million and $175 million in 2023 and 2024 respectively.
Beyond 2024, we currently expect annual realized net performance income to continue to grow that some of our larger direct lending come legal funds raised over the past few years enter their hardest period.
As an update since our investor day of August of 2021, the expected aggregate future net realized income from European waterfalls funds raised through year end 2022, that increased by approximately $1 billion to about $2.5 billion.
In terms of our American stock funds, monetization will be market dependent and episodic and depend on market conditions and other factors.
We have approximately $250 million in accrued net performance income in American-style funds past their investment periods.
So, a full year in 2022, our effective tax rate from our realized income was approximately 90%. Assuming all operating group units were exchanged fully into common shares.
For 2023, we would expect a slightly higher effective tax rate, ranging from 10 to 15% on a fully exchange basis, with a range depending on the level of realization.
As Mike touched on earlier, the growth in our AUM and part reflects our consistent long-term In 2022 was another strong year. In credit, our US senior direct lending strategies generated growth returns of 1.9% for the quarter and 9.5% for the full year.
Our publicly traded VDC, ARIZ Capital, just reported record fourth quarter core earnings and had another strong year generating a net return of 1.9% for the fourth quarter and 7.1% for the full year.
Our junior direct lending strategy generated a course return of minus 28% for the quarter and positive 2.5% for the year, with much of their client related to market-based adjustments, particularly impacting the fixed rate securities and those portfolios.
Our European direct lending strategies generate in gross returns of 2% for the quarter and 10.5% for the year.
All these strategies had returned significantly in excess of the comparable earthquake markets for the full year.
The US real estate equity composite gross returns declined 6% for the quarter, but we're up 11.3% for the year. And their European real estate equity funds gross returns declined 7% in the quarter and declined 3.8% for the year.
still significantly outperforming the public re-endices.
by strong fundamentalism in industrial and multi-family sectors.
market values have broadly declined. That's higher interest rates have weighed on discount rates and exit multiples.
Within our non-trade meets, A-RET generated a 0.3% net return for the fourth quarter and a 12.7% return for the year. And A-I-RET generated a net return of 0.1% for the fourth quarter and 26.8% for the year.
Our performance was supported by the strong runs over as an occupancy.
statistics that might reference earlier.
Private equity, both of our strategies significantly outperformed the broader equity markets during the year.
Our corporate private equity composite generated gross returns of 0.7% for the quarter and 4.3% for the full year. Our special opportunities fund one generated a gross return of 3.9% for the quarter and 9.1% for the full year.
Our secondary strategy reports returns on a one quarter lag basis.
Private equity secondary generated gross returns of minus 5.6% to the quarter and minus 4.9% for the year. No state secondary generated gross returns of minus 1.8% to the quarter and a positive 20.3% for the full year.
At the beginning of the year, you'll look to set a quarterly dividend at a fixed level for the coming year.
Based on the significant outperformance of our fee related earnings relative to our defense and our strong growth prospects.
We've elected to increase our quarterly dividend to 77 cents per share class A and non-boding common stocks, or $3.8 as annual, a 26% increase from the $2.44 dividend per share in 2022 as Carl mentioned.
We believe this new dividend level is appropriate based on our current level of FRE and our growth prospects from our significant drive power for deployment, our flexible strategies, and large fundraising pipelines.
Before we turn the call back to Mike, let me touch on our forward outlook.
As you will recall, we gave the market long-term guidance of 2025 at our investor day in August of 2021, including a target of $500 billion in more in the U.M. A run rate FRE margin of 45 percent, FRE rose of 20 percent per year, and growth in dividends for a class A share of 20 percent per year. After this point,
I'm pleased to say we have meaningfully outperformed these expectations with over a 40% FRE cager from mid-2021 through year-end 2022.
Because FRPR was not contemplated in our investor day.
20% per year FRE growth rate guidance. We would like to clarify that we expect a 20% more annual growth in our FRE from 2022 to 2025, excluding FRPR from our non-traded rates.
We do expect to generate attractive levels of FRPR on a growing base of eligible funds.
expect to generate attractive levels of FRPR on a growing base of eligible funds, but the growth rate is naturally harder to predict.
We remain on track to meet or exceed the other elements of our investor day guides.
I'll now turn the call back over Mike for his concluding remarks.
Thanks Jared. So we spent 2022 investing in talent and strengthening our front and back office teams to set us up for strong growth in the years ahead.
We believe that we're now in a position to capitalize on these investments with a large fundraising cycle.
a strengthened capability to invest across a greater segment of the addressable market and enhanced global platform.
Based on the foundation that's already been laid, we have good visibility into the next several years of growth.
In addition, we're seeing strong synergies, earnings contributions, and future earnings potential from our recent acquisitions that have us all very excited.
Our ESG and DEI teams are executing at a higher level as we continue to focus on our impacted areas.
Overall, our culture makes us a stronger workforce and better investors as we strive to make a positive impact for our stakeholders and our communities.
As it relates to potential new acquisitions, our recent transactions filled specific product gaps in areas that we identified as high growth opportunities.
We now have a broader platform to build businesses organically, and as a result, the bar for new M&A activity is naturally higher.
That said, we'll continue to look for a strategic add-on acquisitions in strong growth areas where we can leverage our platform advantages and bring attractive investment products to our LPs. Just this week, we agreed to purchase the remaining 20% of Aries SSG's management business still owned by the original founders.
with the closing subject to receipt of regulatory approvals.
Our purchase of the remaining stake was contemplated in the original agreement, but both parties mutually agreed to accelerate the timing.
In connection with this almost entirely all-stop transaction, we're planning to rebrand the business area's Asia and expect it will be our platform for continued growth in the Asia-Pacific region.
I'm proud and grateful for the incredibly hard work and dedication of our team and for all that they do every day to deliver for all of our stakeholders.
Also deeply appreciative of our investors continuing support for our company and want to thank you for your time today.
And with that operator, I think we're ready to open the line for questions.
Thank you. If you would like to ask a question, please press star followed by one on your telephone to that. If for any reason you would like to remove that question, please press star followed by two. Again to ask a question, please press star followed by one. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question.
Our first question today comes from the line of Craig's second dollar from Bank of America. Please go ahead, your line is now open.
Hey Mike, hope everyone's doing well.
All good here Craig, thanks.
So with US banks building up reserves and getting ready for a recession, we wanted to get an update on how Aries' private credit portfolios are prepared for a rise in corporate defaults. And also, you know, what have you seen in the fourth quarter in January in terms of rejectedte
early credit quality indicators across your portfolios. Sure, I think Kip's on, so I'll give you my view, but I think the good news is given the size of ARCC and the fact that they just announced it's a good...
indicator of the state of play within the existing portfolios and and probably a broader Proxy for what we're seeing across the private private portfolios here at areas
We announced that if you look at year over year EBITDA growth in that book, and it was true for our European, it was about 9.1% LTM period over period. So while I think like many we're seeing slower growth, there's still good fundamental strength within that book....to and we've talked about some prior calls, a lot of these...
loan to value, they're generally speaking in and around 45% loan to value. And the reason I mention that is I think a lot of the impact from rising rates ultimately will be borne by the equity as the discount rate changes.
and then there's a value transfer from the equity to the debt.
Needless to say, as we've seen, base rates go up close to 500 basis points. It does put strain on interest coverage. Interest coverage in the portfolio is, though, given the low starting point, is still at levels that make us comfortable in our consistent with where prior cycles were.
So what makes this so unique Craig is we're seeing strong fund amounts of performance and the conversation about defaults right now is actually happening at a time when rates are going up and earnings are not necessarily slowing whereas in prior cycles we've seen rates going down and earnings beginning to slow at a much faster pace.
So from the private credit perspective, it's a really interesting situation because we're accumulating you know significant excess return ahead of a conversation about any you know any potential defaults. To that point, I still believe that while we will see an increase in amendment activity and default activity...
will double the size of the construction outline of the structural
You know pretty unique position in terms of performance a lot of liquidity and dry powder on the platform to both defend existing exposures and And play offense if need be but I think a pretty interesting vintage across the board for private credit.
I covered a lot there. I don't know if you wanted it.
And I think I think you got most I think you I think you got most of my Craig The only other thing that we said on that call for the PDC yesterday Was that we did see some modest increases in amendment activity through the fourth quarter and into the first and I'd expect that'll continue Throughout the year, but he's not huge cause for concern from our standpoint
Thank you, Mike, for the comprehensive response there. Just as my follow-up, I know areas like to be opportunistic in recessions. I think we'll always remember the RCC acquisition of Allied in the financial crisis. But how should we think about opportunistic M&A at the whole co-level?
and then also at the BDC level, should a recession here transpire.
Yeah, look, I think we have a lot of experience being opportunistic on corporate M&A at the parent company within the publicly traded subsidiaries and within our portfolio. It's core to who we are as investors and managers. I would expect that those opportunities will present themselves given...
entry points you should expectable do it.
Thank you Mike.
Thank you.
The next question today comes from the line of Alex Bloestein from Goldman Sachs. Please go ahead. Your line is now open. Hi, good morning, everybody, or good afternoon. Thanks for the question. I was hoping we could start maybe with a question around, Mike, just kind of getting your pulse on opportunities for credit deployment. When we look at the fourth quarter...
you seem to have been very active in what was generally, I think, a fairly slow environment for new deal activity. So maybe expand a little bit where you guys were more active and more importantly, looking into kind of what you're seeing so far in 2023, areas where you expect to be a little more active and a little less active in.
how active are the banks? So I'm assuming not a lot activity for the banks, but are they starting to come back to the market a little bit more given the fact that the market backstroke has gotten a little bit more constructive.
Yeah, thanks for the question, OX. So, you know, interesting, we know to this in the prepared remarks.
I was pleased to see that when we told everything up after what was a challenging year for markets generally that our deployment was right on par with what it was in 2021. And 2021 was obviously a different market backdrop just in terms of velocity of capital and transaction activity. And I think that that speaks to the breadth of the platform by geography.
towards public markets as we were seeing, we've talked about this before, opportunities emerge in the public markets that were frankly more attractive than what we were self-origining in the private markets. Add those markets start to come more in line with one another, we were able to start to be more opportunistic.
on the private side of the house as well. And that continues. So, you know, look, even in markets where you have lower transaction volumes, given the competitive dynamic today, meaning challenged access to the public equity market, challenged access in the loan and high yield markets.
Lower bank liquidity, private market solutions are pretty important. Right now, it's the marginal liquidity provider, so we're finding ample things to do irrespective of a lower M&A environment.
When you look at ultimately pipeline development, I think we're not going to see M&A volumes at least in the private markets pick up to where they were until we all agree that we've stabilized from a rate perspective. So my own personal perspective is we get towards the end of the year.
and everyone has a general consensus view that hiking cycles over, I would expect that there's a fair amount of pent up demand and we'll see the the M&A machine turn back on.
I also highlight obviously places like special opportunities where we closed our second fund last year has been very active, places like alternative credit, very active, opportunistic real estate debt and equity, very active. So a little bit of a next shift but...
Still really, really exciting investment opportunity. Great, thanks for that. My second question, Jared, probably for you. I wanted to drill down a little bit into the 26% dividend growth that you announced this morning. Obviously supported by a very robust outlook you guys have for the next year.
fear-related earnings, et cetera, and all the things that show that sort of discussed already on the call. But is that the way of effectively saying, hey, look, you know, F.R.E. girls could be north of that, and that sort of what informs your confidence around raising and by as much, or do you partially incorporate the fact that European-style waterfall contribution will continue to rise in those arcs?
FRE asks almost cashless and that kind of what gives your confidence in going above the typical dividend increase that we've seen in the past. Thanks.
Thanks, Alex. Look, it's a number of the factors all wrapped into one. First is, yes, we have a lot of conviction on our FRE growth. As I mentioned in the script, we reiterate our guidance at the 20% per year growth. That's X, the FRP are related to the reads. That's a little bit more difficult to predict.
So we know that we have that strength. We also just came off of a very strong year where we easily covered the dividend for the year based on our FRA growth. And then going into next year, as you mentioned, we continue to see a nice pipeline of the European-style waterfalls coming in. So when you mix all those factors together, we have a high degree of confidence that that's a part of the European regime.
Hey guys, thanks so much for taking my questions. I wanted to follow up on something Mike you said at the very beginning of the call. You said investors generally remain under allocated to alts with a little under 10% of global AUM. I'm just curious, you know, how are your institutional clients sort of thinking about their allocations? I mean we've heard a lot from some of your peers about the denominator effect and private equity. Do they tend to think about credit separately? You know, is there a lot more room?
The speaking denominator effect is impacting what I call regular way private equity strategies or growth equity the most.
You also have a little bit of a numerator effect in the sense that private valuations are lagging public comps and so I think it's hitting both sides of that equation. Our private equity business is obviously positioned a little bit differently with SOF able to invest around the balance sheet in distress and transitioning.
companies and industries and our core buyout franchise as I mentioned in the prepared remarks having the ability to invest in Distress for control in addition traditional growth by outs, which we think is a pretty unique
set up. For private credit, and there was an interesting article
in the paper is a couple weeks ago just talking about pension allocations as an example, being just shy of 4% of allocations with a general commitment to see that doubling. And I would say that that's probably true for most of the other institutional investor segments as well.
So we are not seeing any reduced demand for private credit and in many cases we're actually seeing appetite increase.
And I think the increase the reflection to your question that people are going into this cycle under allocated.
Number two, it's easier to deploy in credit in a market like this. So for folks who are looking to capture excess return in this vintage credit as an easier way to put money in the ground. And three, just to put it in perspective, if you look at generally speaking...
Performing first-leaning senior secured credit across the private credit landscape you're generating 10 to 13% rates of return short duration floating rate That's a really compelling place to be on a relative value basis But it actually is liquidity enhancing because a lot of these institutional investors whether they're pension funds or
Endowments or insurance companies are probably trying to beat a bogey of 6% on the low end and 8% on the high end. So if you're generating current short duration floating at 10 plus with rates still on the rise Everything in excess of your hurdle is actually helping to refill the bucket of Return that you gave up in your fixed income and equity book. So there's a lot at play here
expecting from there over the next several years.
Sure, just to clarify, we signed, but we're still waiting for regulatory approval. We decided to pull it forward really as an indication of the opportunity that we see there and just felt that by owning 100 percent.
versus 80% would give us just a better opportunity to align incentives along a shared vision for growth and really drive growth across the region under the unified areas brand. So we're super excited about this acceleration. I think it's a good indication of
of what we would see there. If you look at the businesses that exist today, the legacy SSG businesses we bought was a leader in private credit in two fun families, one being a distressed and special six business, and the other being a more
regular way senior lending business and both of those families of funds have performed well and grown in our two years of ownership.
We've been adding people and capabilities across the region. We've talked about on prior calls that we had a successful launch and closing of an Australian New Zealand direct lending business. We have added senior folks in and around our real estate and infrastructure business.
We've added secondaries, professionals, and raised capital to expand our secondaries business there. So I would say at a high level, while a lot of those markets are still developing and don't necessarily offer the same scale of opportunity or breadth of opportunity that the US and Europe do, our vision for our APAC business is that at maturity it will be a...
standpoint, but that's the vision. I think from a growth standpoint, the good news is that they have been growing at a similar pace to the rest of the platform, obviously off of a smaller base, but enjoying good growth and we'd expect that to continue.
Great, thanks so much.
Great. Thanks so much. Thank you.
The next question today comes to an alignment of Michael's legrests from Morgan Stanley . Please go ahead, your line is now open.
Good morning. Thanks for taking the question. What did a circle back to some of the comments you made earlier about investments that you've been making in the platform over the past couple of years? I hope you can maybe elaborate and kind of where we are at this point. What's left in terms of the build out and then how we should think about that translating in terms of
G&A and comp growth compared to the double digit growth you guys put up here in 22. How we should be thinking about that into 23. Thank you.
Thanks, Mike. Gary, do you want to say that one? Yeah, sure thing, Mike. The first thing I'd say is that as we went into 2022, we did talk a little bit about how that was really a year of growth of the platform and integration across the platform. That resulted in about 450 net new hires on the platform through the year.
that we've...
Integrated those folks, brought them in and really need to assess and evaluate the capabilities and get our fundraising off the ground. So once that fundraising then is completed and we deploy it, as you look into the back half of 2023 and into 2024 and 2025.
what you'll start to see is that's when you'll see more significant margin expansion. So as we kind of got at the beginning of last year, we thought that we would have a very moderate margin expansion in 2022. I'd say that it still won't be at the pacing that maybe we had sowing back in 1920.
and 23 because of the headwinds we received from that full year of hiring. And then as we deploy capital from this fundraising cycle into 2024 and 2025, that's when you'll see that margin expansion really accelerate towards that 45% plus that we talked about. Great, thanks for that.
That's right. Yeah, I was going to say, because you have to about GNA as well, say about half of our GNA is headcount related. So you see a very close correlations to GNA growth at headcount rows. The other half is a little bit more episodic in terms of what events are occurring at what time or where capital is needed across the platform in terms of investment.
So I guess what's required in order for those fees to come through, as I mentioned, most of these are credit funds, so it's just the loans maturing in the portfolio and then those performance fees get crystallized upon maturity of the loans as opposed to selling an asset like a PE fund.
Maybe you could just remind us on that. And then just how do you think about the potential for variability, either upside or downside, to that guidance of the macro environment, say, is more challenging in a recession, or off to the races, and it's a new cycle? Thank you.
When you're thinking about the portfolio, you're thinking about exactly right that the credit funds that are within there are much less episodic in nature. They are based on the duration of the underlying assets. None of those assets don't make it to the end of their life before they're refinanced.
So that's what drives a lot of the payments within that balance and that's what makes it a lot more predictable. As those loans today yield above the hurdle rates, you're consistently building those amounts that you have on accrual and as interest rates rise, as it's predominantly a floating rate portfolio, you do see the benefit of that.
Another is the difference between the amount you'll actually realize in what's currently accrued today. What's currently accrued today does have some of the variability related to unrealized game loss, which as you know, as these loans mature, they will mature at par, and that fully yield will come in. So there's a flight.
benefit that you get from that aspect of it. There's also a benefit that you'll get in future years that's not modeled into an accrued balance today of that increase in interest rate. So that's why you couldn't have a difference between what we've accrued on our books and what we'll origin, what we believe that we will.
recognized over that several year time period. We do believe that these balances are more predictable because of their credit nature. Now that being said, there are some private equity style funds in there that are from our special opportunities group and from our real estate group, they're European style and are still more episodic if they get to the end of their life.
but we generally know that those are later in their lives and we're starting to see monetization come through on those already.
So, but you're exactly right to think of it in terms of...
being credit driven and therefore being more predictable in nature as well as there are benefits that we see in that portfolio from rising interest rates.
Great, very helpful. Thank you.
Great, very helpful, thank you.
Thank you.
The next question today comes from the line of Jerry O'Hara from Jefferies. Please go ahead your line is now open.
Thanks and good afternoon. Just thematically I think renewables and energy transition are a couple topics that we're kind of increasingly hearing about and I guess cited as high growth opportunities. So Mike would be interested to kind of get your thoughts on how ARIES is thinking about these end markets, perhaps what you're hearing from.
increasingly important topics across the landscape. I think the good news is we were early in identifying that transition as an opportunity. So as a reminder,
In our fifth infrastructure fund here, which goes back now, you know, two and a half vintages, we pivoted from more traditional energy infrastructure into renewables and renewable energy. And now in the rearview mirror, when you look at that fund, about 60% of our deployment.
in that fifth fund wound up being in the energy transition and renewable power with appropriately high returns relative to traditional power players. That set us up to launch our first climate infrastructure fund a couple of years ago.
You know, candidly, the fundraise took longer than I would have expected because I think we were a little early in recognizing the long-term secular trend there. Good news is it was well raised and well invested and we are now in the market with our second Climate Infrastructure Fund and are actively raising that.
And while it's not closed yet, I think given some of the demand for exposure to energy transition, we have confidence that it will be. Obviously there's a lot of positive catalyst, particularly in the U.S. market on the heels of the Inflation Reduction Act that's also helping to bolster investor demand.
Two, as we talked about in the prepared remarks, we obviously made the acquisition of the AMP infrastructure lending business. That team and fund family has been fully integrated into the platform. We had a successful close on IDF 5 at 5 billion last year. That fund is well deployed. And while we invest broadly across the infrastructure spectrum, not surprisingly, though the very first lotus process has been mandates, the one in the background, the first image
generation, small modular, nuclear reactor business, which we think is really at the forefront and cutting edge of the future of the energy transition. So we're very focused on it. We have multiple products and avenues to invest behind it, and I would think that with continued good performance that's going to continue to be a good growth area for us.
Great, thanks for the reminder and update. That's it for me. Appreciate it.
Thanks, Jerry.
The next question today comes from a line of Patrick Dabbit from Autonomous Research. Please go ahead to your line of snow open.
Good afternoon, everyone. Thanks. What's the one I've been asked? Maybe could you speak a little bit how the wealth management flow experience has evolved since quarter end. And if you're seeing any meaningful impact of the press noise, obviously in that channel, kind of late in the quarter.
afternoon, everyone, thanks. What's the one I've been asked? Maybe could you speak a little bit how the wealth management flow experience has evolved since quarter end. And if you're seeing any meaningful impact of the press noise, obviously in that channel, kind of late in the quarter.
Yeah, so the good news is these numbers get publicly released so you guys will be able to see how we're doing. You know, I think the good news from our perspective is that we've been having a different experience than some of the larger peers. You know, if you look at our...
Wealth Management platform right now we have obviously our two non-traded reeds.
AI REIT and A REIT. We have our Interval Fund. We have our recently launched private markets fund as we talked about our recently formed non-traded BDC. And if you look across all four, we've actually had positive flows.
So to put that in perspective, if you look at inflows into the non-traded REITs, Q4 inflows were about 430 million against outflows of about 157 million. So a healthy...
Cushion, just to contextualize that that 430 was down from a little over 840 in Q3. So not surprisingly given, I think some of the noise in the channel, but also just some of the market reaction to transitions in the real estate business.
We've seen slower inflows, but we haven't seen a disproportionate amount of outflows. And that's generally been the case throughout the course of the year. Going into 2023, still too early, but again, as we mentioned in the prepare remarks, while our two REITs are quite substantial, you know, aggregating about the 13.5 billion.
in the first half of this year. So some of the headwinds we're able to grow through just as we're adding new distribution relationships. And then we do have some unique.
elements to our business in terms of how we invest, but probably most importantly is we have a 1031 exchange program that feeds into both of our REITs that just promotes a stickier investor base if you will. So it's something we're watching closely. We are not slowing our investments in the channel. We're still very long-term believers.
in the growth in that market. And at least, as we're experiencing it, we've seen a modest slowdown in flows, but we're not seeing net outflows. Next, that's all I got. Thank you.
The next question today comes from the line of Adam Beatty from UBS. Please go ahead, your line is now open.
Thank you and good afternoon. I just wanted to get an update on the secondaries business. I think last quarter there was a little bit of rebranding, maybe some truncated fundraising. Seems like an opportune time to be out in the market with something like that. So just wanted to get maybe some outlook on
when you might be back in the market, what kind of funds and maybe how we're kind of magnitude we're working at. Thank you. Sure. So the update is you're right. We have fully integrated what was the landmark.
platform. We're very pleased with the way that the integration has grown. We have added a significant number of new people across the platform here in the US and Europe . And as I mentioned earlier in Asia Pacific.
What we have tried to build just to leverage the strengths that we have within the GP and L.P. community is kind of a broader set of secondary solutions across the different verticals. We have added a credit secondary's business.
which we think really plays to the strength that we have in private credit. We have spun up our team and are actively raising capital there. Something we're super excited about. We are in the market with our next generation of infrastructure secondaries, which is a big growth area for us.
We are currently in the market with our ninth real estate fund, which was a fund that was ready to launch when we acquired. We did to your point close out our prior vintage of private equity and we'll be coming back into the market at some point.
with kind of the Aries version of what that strategy is going to be going forward. We're also excited that we're able to leverage the momentum we have in the Wealth Management Channel to launch the Public Markets Fund, which is largely anchored by our secondary's capability. We're seeing good scaling there and we would expect that to continue to grow.
and now we're executing. So we'll keep everybody abreast of the progress there, but a lot to be excited about.
Excellent, thank you. And then just maybe a quick one on the performance of the real estate strategies in the quarter. Obviously, the full year was quite good. The underlying fundamentals, the lease re-ups that Mike talked about seemed very good. But in the quarter, maybe a little bit more of a negative mark than in the quarter.
than some might have expected. So just want to give a sense if there's any time lag or other dynamics that play through there, and anything that might be ahead for one queue. Thank you.
Yeah, look, there's needless to say when you think about real estate, you know, the impact of rising rates, you have to just think about how interest rate increases correlate to changes in the cap rate and valuation environment, and how increased rates challenges certain, you know, property sectors from a...
from a debt service standpoint. I think to your comment, you know, we are fortunate that close to 80 percent of our exposures are in multifamily and industrial and the fundamentals there have been very strong and so even in a world where valuations may be coming in.
you're growing through them with an installed base of tenants that is, you know, continuing to drive pretty strong NLI at the property level. And I think that's kind of the way to think about it, which is, you know, not all real estate is created equal. We're in, you know, gateway markets with great assets that are all performing.
and what we're able to command given the assets we own, the fundamental strength in the portfolio we think is pretty clear. I do think for what it's worth that the real estate markets are going to be one of the more challenging parts of the private market landscape. It's one of the reasons why we're so focused.
right now on our opportunistic real estate franchises, just to make sure that we're appropriately capitalized to take advantage of the distress that should roll through certain parts of that market as rates continue to go up here.
Got it, makes sense. Thanks very much Mike.
God it makes sense. Thanks very much, Mike. So, thank you.
Thank you. There are no additional questions waiting at this time, so I'd like to pass the conference call back over to Michael for any closing remarks. Please go ahead. We don't have any. We thank everybody for their time. Sorry if we went a little late, but we appreciate everybody tuning in and for the support, and we'll look forward to giving everybody the update next quarter.
There are no additional questions waiting at this time, so I'd like to pass a conference call back over to Michael for any closing remarks. Please go ahead. We don't have any. We thank everybody for their time. Sorry if we went a little late, but we appreciate everybody tuning in and for the support and we'll look forward to giving everybody the update next quarter. Thank you.
This concludes today's conference call. Thank you all for your participation.