Q3 2023 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 Tuesday October 31st 2023, I will now turn the call over to Carl Drake head of public market investors.
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Good morning, and thank you for joining us today for our third quarter conference call.
I'm joined today by Michael Era, Getty, our Chief Executive Officer, and Jody Phillips, our Chief Financial Officer.
We also have a number of senior professionals with us today, who will be available during the Q&A session.
Before we began I want to remind you that comments made during this call will contain forward looking statements and are subject to risks and uncertainties, including those identified in the 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 and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Ares fund.
During this call we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures 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.
Note that we plan to file our Form 10-Q in the first week of November.
This morning, we announced that we declared a fourth quarter common dividend of <unk> 77 per share on the Companys class a nonvoting common stock representing an increase of 26% over a dividend for the same quarter a year ago.
The dividend will be paid on December 29th 2023 to holders of record on December 15th.
Of note, we plan to update investors about our new quarterly dividends for 2024 during our fourth quarter earnings call early next year.
Now I will turn the call over to Michael are getting.
Thank you Carl and good morning, before we begin I wanted to take a moment to acknowledge the horrific terrorist attacks that occurred in Israel and the subsequent loss of lives.
Our Hearts go out to all the innocent people for the pain and suffering on both sides throughout the region.
We're all holding onto hope for a peaceful resolution.
Okay.
Now I'd like to begin with some market commentary and quarterly business and strategic highlights.
In the third quarter the markets adjusted to the expectation for rates to stay higher for longer while the underlying economy remained resilient with robust GDP, a strong labor market and continued modest growth in corporate profits.
We're seeing the lag effects from higher rates and this slow and uneven economic growth play.
Play out across the global markets that we invest in.
Transaction activity remains slower than usual due to the higher cost of capital and valuation disparities among buyers and sellers yet there is significant pent up demand and a large amount of aging private equity dry powder available to be invested.
We're seeing our private pipeline build generally with higher quality assets and strong growth characteristics coming to market.
We're also seeing a growing need for creative liquidity solutions, recapitalization, and rescue financings and more interest in secondaries.
With this economic backdrop, it remains a compelling time to invest across private market assets with defensive characteristics, particularly within private credit as we see risk reward characteristics that are favorable as we've seen in many years.
Our quarterly results continue to demonstrate our strong growth and resiliency in the slower and more challenging market environments, we raised $21 $9 billion in new commitments in the quarter, our second highest fundraising quarter in the history of our firm and we've now raised $53 4 billion through the end of the third.
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We continue to benefit from our existing institutional investors, who re up or cross over into new Ares fund products, along with new investors, who recognize our consistent fund performance and leadership in managing private assets.
We also saw an increase in flows from our wealth management channel supported by our newly launched non traded BDC.
Fund performance across our primary investment strategies also continues to be a highlight as approximately three quarters of those strategies performed well compared to their respective relative public indices or exceeded their annualized target returns in the third quarter.
We also incrementally increased our third quarter deployment, which supported growth in our management fees and fee related earnings.
And the first nine months, our management fees and fee related earnings each grew by 20% or better compared to the same period last year.
Yeah.
Now, let me provide an update on our three private credit funds, which are all on track or have already closed at levels in excess of prior vintages.
In the third quarter, we held the first close for our third U S. Senior direct lending fund of nearly $6 5 billion in equity commitments plus nearly 2 billion in committed fund leverage.
The first closing of L. P commitments for this fund exceeded 80% of the total equity commitments for the predecessor fund.
With additional close as expected into the first half of next year, we expect to meaningfully exceed the prior fund size of $8 billion of equity commitments and $15 billion in total investable capital.
Overall, our U S direct lending business raised $11 $6 billion in the third quarter, which brought our total AUM and this strategy to nearly 118 billion.
As a market leader, we believe that our global direct lending business continues to have significant white space is the private credit markets are meaningfully undersized compared to the $5 trillion dollars of private equity AUM.
We also raised an additional 750 million euros for our sixth European direct lending fund in the third quarter and almost $800 million more euros in October, bringing total commitments to $9 9 billion euros to date.
We have line of sight to over 11 billion euros of equity commitments by year end, which would equal or exceed our prior fund vintage.
We expect to surpass our prior vintage with additional closings from investors in our pipeline by early in the second quarter of 2024.
With over 85 investment professionals located in six offices across Europe, we believe that we have the largest and most of that in your direct lending franchise on the continent, managing over 60 billion a day U N.
With our leading alternative credit strategy Pathfinder to close to approximately $2 2 billion in the third quarter, bringing total commitments to $5 8 billion at quarter end.
And as we publicly announce yesterday pathfinder to held its final close at its hard cap of $6 6 billion nearly double the size of the predecessor fund.
We experienced significant investor demand hitting our hard cap in only seven months since the first closing.
In addition to Pathfinder to our open end core alternative credit fund raised $750 million in the quarter, bringing total commitments to over $4 2 billion.
The strong investor demand for alternative credit strategies is driven in part by filling the gaps created by a pullback from traditional providers along with the structural changes that we're witnessing in the banking industry.
With more than 32 billion in AUM, our alternative credit business as a leader in the private non rated and illiquid segment, if the asset backed market and is poised for growth and what we believe is at least a four trillion dollar global addressable market.
In Asia credit, we raised nearly $400 million in the quarter, including an approximate $200 million final close in Ares SSG capital partner, six bringing final commitments to $2 4 billion, including a sidecar fund.
We're seeing strong economic trends and robust corporate earnings growth in India, and Australia, which account for 60% of our investments across the region and we're seeing a growing opportunity set for financing solutions for sponsor led acquisitions in these markets.
Within real assets, we raised more than $500 million and a European real estate debt mandate, which now totals over $1 billion and we anticipate that this strategy will continue to grow.
Our real estate debt business now exceeds $11 billion and we believe the team is well positioned for further growth due to investor demand and the current acute need for capital in the industry.
Our second climate infrastructure fund raised another $200 million in the quarter plus an additional $300 million in October and this completed the fund's first close with total equity commitments of nearly $1 1 billion or approximately 80% of the total equity commitments in the prior fund vintage.
We currently have over 30 funds in the market and by yearend, we expect to have first closes and our seventh corporate private equity fund or.
Our inaugural credit Secondaries fund and our third infrastructure Secondaries fund as.
As well as additional closings in our larger funds such as our fourth U S opportunistic real estate equity fund, our second climate infrastructure fund and our sixth European direct lending fund as just discussed.
Through the end of October we have now raised nearly $58 billion and we expect total fund raising for the year to exceed 65 billion.
Well ahead of the $57 billion, we raised last year.
Throughout next year, we have several of our largest fund series expected to hold first closings for successor funds, including our six infrastructure debt fund, our third special opportunities fund and our third U S Junior direct lending fund.
While our core fund raising continues to be supported by expanding within the global institutional market are strategically important insurance and wealth management channels are also poised for growth.
Our affiliated insurance business, a speeder continued its organic growth with new assets of more than 1 billion, bringing total AUM to $10 $6 billion by quarter end.
We believe investors are attracted not only to areas as credit investing expertise, but also the technological advantage is that the speed is bringing to the annuity market.
Our growth outlook is promising as we're seeing demand from new annuities reinsurance flow and opportunities for block trades, which we would expect to fund largely with third party capital.
We believe that we are on track to meet or exceed our goal of reaching 25 billion or more than that.
Oh and by the end of 2025.
Within wealth management, our ongoing objective is to market a limited number of core semi liquid institutional quality products through our global wealth management channel.
We're well on our way to accomplishing this over the next several years and today, we're one of the largest alternative managers in the wealth industry with over 120 professionals, our footprint across North America, Europe and Asia.
<unk> products and relationships with nearly every major wire house and private bank.
We expect to continue adding strategic partnerships and gained market share as we scale each one of these products.
After launching our non traded BDC Acs primarily on one wire house in June it has seen steady momentum with approximately $550 million raised in the first three months, including the September flows which closed on October 1st.
Bringing total AUM to over $2 7 billion.
There are four additional global platforms that we expect will add ASF in the first half of 2024.
And despite a tough market for real estate fund raising we continued to see net aggregate flows collectively across our two non traded Reits, including the 10 31 exchange programs.
Turning to deployment, we invested $16 7 billion in the third quarter, which was up from the $15 2 billion in the second quarter, but down from $18 3 billion in the third quarter of 2022.
We're beginning to see signs of large deal activity returning as Q3 was the third highest quarter for $1 billion plus unit tranche deals financed by the private credit markets.
While still early end markets remains slower than we'd like we're encouraged by our fourth quarter to date investment activity in our pipelines.
For 2024, we currently expect market activity to improve due to the aging private equity dry powder that is approaching the end of its investment period growing pressure from Lp's return capital stronger sentiment among middle market companies and further pressure on balance sheets and capital structures as rates stay higher for longer.
We're also seeing a growing opportunity to partner with the banking sector through our alternative credit business.
The bank market continues to be impacted by regulatory changes asset liability mismatches and an inverted yield curve all of which changed the way banks participate in certain segments of the market.
Over the years, we've developed extensive bank partnerships, where we have the opportunity to provide solutions to augment their existing businesses to improve risk weightings and reduce capital charges. While at the same time generate attractive returns for our investors.
Our alternative credit team believes that we are in the early innings of these types of transactions and we're seeing an increase in our collaboration with our banking partners.
Finally, we continue to explore inorganic growth opportunities to expand our business through both product and geographic expansion.
In October we closed on the acquisition of Crescent point, a leading Asia focused private equity firm with $3 $7 billion in assets under management.
The Asia Pacific Region is a key geographic target for us and we continue to look at various ways to expand each of our business lines into that region either through organic team builds for strategic acquisitions.
And as you may have seen we also recently closed a strategic partnership and investment in Vinci partners, a leading alternative asset manager in Latin America.
We've known da Vinci team for over a decade and are excited to collaborate on distribution product development and other business opportunities in Brazil and across Latin America.
We believe that the Latin American markets are in the very early stages of shifting capital into the private markets, particularly within private credit.
This is similar to the trends that we saw in the early two thousands in Europe and what we're seeing now beginning to play out in the APAC region.
We will continue to look for unique and attractive global growth opportunities for our business.
And now I'd like to turn the call over to Jared for comments on our financial results Jared.
Thanks, Mike.
Hello, everyone. Thanks for joining us today.
In the third quarter, we continue to see strong growth in our management fees fee related earnings AUM and fee paying AUM compared to the third quarter of 2022.
While our realizations were light in the third quarter as we expected we have a clear line of sight on stronger fourth quarter realizations due to our European style waterfall funds.
We're also on track to recognize a meaningful year over year increase in FRP or from our credit funds as I will discuss.
Starting with AUM, we ended the third quarter was $395 billion of AUM.
And we're tracking well to meet or exceed our target of $500 billion or more by the end of 2025.
Our FPA AUM grew to over 247 billion up from over $218 billion. This time last year, driven by deployment across our credit and special opportunities funds and new commitments to funds in our real assets group.
For the first time in our firm's history, we have over $100 billion in dry powder of which over $65 billion AUM.
AUM, not yet paying fees and available for future deployment.
Upon deployment this would generate nearly $650 million incremental management fees and position us for continued FRE growth and margin efficiencies.
From a revenue perspective, our management fees totaled over $643 million in the quarter, an increase of 17% compared to the same period last year, primarily driven by deployment of our available capital and our credit group.
Other fee income of approximately $20 million was down from the prior period as there were certain episodic transaction fees that contributed to our second quarter's results.
As it relates to FRP or in 2023, we continue to expect approximately 95% of our FRP are to be realized in the fourth quarter.
Currently the potential FRP or from our credit funds is tracking well ahead of last year as we are experiencing the benefits of a higher for longer interest rate environment, along with a modestly positive impact on loan pricing from tighter credit spreads.
We are currently estimating FRP or from our credit funds of approximately $110 million to $120 million for the fourth quarter or $40 million to $40 million $44 million of FRE after compensation expenses.
I will caveat that this is still subject to the total return performance of these credit strategies for the full year, including changes in market values in the fourth quarter.
Regarding FRP or from our real estate group as of September 30th two non traded Reits had not accrued any incentive fees on their balance sheets given.
Given the upward pressure on cap rates, we do not expect to recognize fr PR from these non traded Reits in 2023, and earning <unk> in 2024 from these rights may require an improvement in the current valuation environment.
Fee related earnings totaled $274 million, an increase of 18% from the third quarter of 2022, driven by higher management fees from deployment.
For the year to date period, we're tracking at over 20% growth in FRE, we remain confident in our ability to generate 20% or better FRE growth annually through 2025, excluding any FRP are from our non traded Reits as we discussed on our call in February.
Our FRE margin in the third quarter was 41, 2% roughly 40 basis point improvement from the second quarter of 2023, and a 100 basis point improvement from the year ago period.
As we have said in the past, we expect to see a gradual expansion in margins that could accelerate in periods of higher deployment of corresponding growth in AUM.
As a reminder, in the fourth quarter, we typically see a drag on our FRE margins related to F. Our PR, which are typically in the mid 30% range.
Excluding this FRP art impact we do expect continued modest FRE margin expansion in Q4, and we remain confident in our ability to reach a 45% run rate FRE margin by the end of 2025.
Our realization activity was slower in the third quarter due to limited American style realizations in several of our equity strategies, coupled with a typically slow third quarter for European style waterfall realizations as discussed on our last call.
Given the early ages of many of our European waterfall style funds, we typically see tax related distributions in the first fourth quarter with a clean up amount in the second quarter related to tax filings.
Unknown Executive: 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 Tuesday, October 31, 2023.
However, as our 2017 and 2018 vintage European waterfall style funds continue to season, we expect to see larger and more consistent European waterfall realizations likely begin in 2025 and thereafter.
Carl Drake: I will now turn the call over to Carl Drake, head of Public Market Investors Relations for Ares Management. Good morning and thank you for joining us today for our third quarter conference call.
For the fourth quarter, we currently expect approximately $45 million in European waterfall style net realized performance income.
Carl Drake: I'm joined today by Michael Erigetti, our Chief Executive Officer and Jarrod Phillips, our Chief Financial Officer. We also have a number of senior professionals with us today who will be available during the Q&A session.
Looking forward our potential net performance fee income from European style funds has increased from $2 $5 billion earlier in the year to $3 5 billion.
Carl Drake: 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 and our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results and nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any Ares fund.
This potential amount has continued to grow as we raise additional European style funds, along with the compounding effect of higher interest rates on our credit life funds.
At the same time, we're seeing the duration of these expected cash flows extend out there fewer repayments and less overall transaction activity.
The extended fund duration has a positive compounding effect on the total realization value as the investments remain in our portfolio longer but it impacts the timing of these realizations.
Carl Drake: During this call, we will refer to certain non-gap financial measures, which should not be considered an isolation from or as 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 gap measures.
Based on our updated estimates and included in the fourth quarter guidance I provided we currently expect approximately $80 million of net realized performance income in 2023 from our EU waterfall funds and about $160 million in 2024.
Carl Drake: Note that we plan to file our 410Q in the first week of November. This morning we announced that we declared our fourth quarter common dividend of 77 cents per share in the company's Class A and non-voting common stock, representing an increase of 26% over our dividend for the same quarter a year ago. The dividend will be paid on December 29, 2023, to hold us a record on December 15.
Our initial view is that there's more than $250 million in 2025.
Our net accrued performance receivables stood at $969 million.
9% from the year ago period, despite nearly $150 million in distributed net realized performance income over the last 12 months.
Notably approximately $94 million of this increase comes from our credit funds, where we're seeing the benefits of higher interest rates above our fixed hurdle rates.
Carl Drake: Of note, we plan to update investors about our new quarterly dividends for 2024 during our fourth quarter earnings call early next year.
Unlike equity style funds were increases in performance fees are based on capital appreciation driven by market multiples and EBITDA growth are eligible credit funds can generate more predictable income from net returns after any credit losses above fixed hurdle rates with limited mark to market risk.
Michael Arougheti: Now I will turn the call over to Michael Aragiti. Thank you, Carl, and good morning.
Michael Arougheti: Before we begin, I wanted to take a moment to acknowledge the horrific terrorist attacks that occurred in Israel and the subsequent loss of lives. Our hearts go out to all the innocent people and for the pain and suffering on both sides throughout the region. We are all holding on to hope for a peaceful resolution.
For example of the $969 million of net accrued performance receivables $694 million or over 70% were in European style waterfall funds with over $500 million in private credit funds.
Michael Arougheti: Now I would like to begin with some market commentary in quarterly business and strategic highlights. During the third quarter, the markets adjusted to the expectation for rates to stay higher for longer, while the underlying economy remain resilient with robust GDP, a strong labor market and continued modest growth in corporate profits. We are seeing the lag effects from higher rates and this slow and uneven economic growth play out across the global markets that we invest in.
We now have nearly $125 billion or over 50% of our incentive eligible AUM in European style waterfall funds and we expect this balance will continue to grow.
Realized income in the third quarter totaled $264 million in after tax realized income per share of class a common stock was 83.
Up 11% compared to the third quarter of 2022.
As Mike mentioned earlier, approximately three quarters of our primary investment strategies performed well compared to their respective relative to public indices or exceeded their annualized target returns for the third quarter with particular strength across U S direct lending alternative credit Asia credit infrastructure debt and special opportunities.
Michael Arougheti: Transaction activity remains slower than usual due to the higher cost of capital and valuation disparities among buyers and sellers. Yet, there is significant pent-up demand and a large amount of aging private equity drive powder available to be invested. We're seeing our private pipeline build, generally, with higher quality assets and strong growth characteristics coming to market. We're also seeing a growing need for creative liquidity solutions, recapitalizations and rescue finance things, and more interest in secondaries.
And credit all of our primary investment strategies have generated double digit gross returns in the last 12 months as we continue to benefit from higher base rates attractive spreads low defaults and strong fundamental performance.
Our credit metrics remained strong across our portfolios.
Michael Arougheti: With this economic backdrop, it remains a compelling time to invest across private market assets with defensive characteristics, particularly within private credit, as we see risk reward characteristics that are as favorable as we've seen in many years.
As an example, and U S direct lending Ares capital Corp's non accruals at cost declined to one, 2%, which remains well below our historical average and the industry averages and portfolio company EBITDA growth remains healthy mid to high single digits for our U S and European direct lending portfolios.
Michael Arougheti: Our quarterly results continue to demonstrate our strong growth and resiliency in these slower and more challenging market environments. We raised $21.9 billion in new commitments in the quarter, our second highest fundraising quarter in the history of our firm, and we've now raised 53.4 billion through the end of the third quarter. We continue to benefit from our existing institutional investors, who re-up or cross over into new Ares fund products, along with new investors, who recognize our consistent fund performance and leadership in managing private assets.
Loan to value ratios also remain attractive in the low 40% range in the U S and mid 40% for our European portfolio.
In private equity both of our investment strategies performed well compared to the public equity markets in the third quarter, we continued to see double digit EBITDA growth across our portfolios.
Within real estate higher cap rates are offsetting the relatively strong rent growth that we're seeing in our portfolios, which are heavily weighted towards the more resilient industrial and multifamily sectors.
Michael Arougheti: We also saw an increase in flows from our wealth management channel, supported by our newly launched, non-traded BDC. Fund performance across our primary investment strategies also continues to be a highlight, as approximately three quarters of those strategies performed well compared to their respective relative public indices, or exceeded their annualized target returns in the third quarter. We also incrementally increased our third quarter deployment, which supported growth in our management fees and fee related earnings. For the first nine months, our management fees and pre-related earnings each grew by 20% or better compared to the same period last year.
This is leading to a muted returns for the third quarter, yet due to our significant overweight in and the strongest performing sectors of industrial multifamily, which account for more than 75% of our real estate gross value our U S and European real estate strategies have performed well relative to the respective public real estate markets over the past two years.
With that I'll turn the call back to Mike for closing remarks.
Great Thanks, Jared and.
In our view the long term secular drivers for our business remains very much intact.
Both institutional and retail investors continue to seek out higher risk adjusted returns and less volatile and uncorrelated alternative assets.
Michael Arougheti: Now, let me provide enough data on our three private credit funds, which are all on track, or have already closed at levels in excess of prior advantages. In the third quarter, we held the first close for our third US Senior Direct Lending Fund of nearly six and a half billion in equity commitments plus nearly two billion in committed fund leverage. The first closing of LP commitments for this fund exceeded 80% of the total equity commitments for the predecessor fund.
At the same time, we're seeing traditional capital providers and banks continue to retrench for a whole host of reasons and areas continues to play a key role in filling the gaps and providing solutions into these markets.
As you saw with our performance to date as well as past market cycles, we can generate strong growth even in tougher market environments. We continue to make investments for future growth by enhancing our product capabilities in adjacent areas and expanding into new geographies and deepening our distribution channels.
Michael Arougheti: With additional closes expected into the first half of next year, we expect to meaningfully exceed the prior fund side that eight billion in equity commitments and 15 billion in total investable capital. Overall, our US Direct Lending Business raised 11.6 billion dollars in the third quarter, which brought our total AUM in this strategy to nearly 118 billion. As a market leader, we believe that our global Direct Lending Business continues to have significant white space as the private credit markets are meaningfully undersized compared to the five trillion dollars of private equity AUM.
With a record amount of dry powder, we are well positioned to invest our capital opportunistically in highly attractive sectors.
And because of the scaling of our private credit business over the past six years, we're in a great position to realize a growing amount of performance income in the coming years from our European style waterfall funds.
All of this is to say that we have strong visibility on continued earnings growth dividend growth and margin expansion.
As always I'm grateful for the hard work and dedication of our team around the globe and I'm appreciative of our investors continuing support for our company.
Michael Arougheti: We also raised an additional 750 million euros for our six European Direct Lending Fund in the third quarter and almost 800 million more euros in October bringing total commitments to 9.9 billion euros to date. We have line of sight to over 11 billion euros of equity commitments by year end, which would equal or exceed our prior fund vintage. We expect to surpass our prior vintage with additional closings for investors in our pipeline by early in the second quarter of 2024.
And operator, I think we can now open up the line for questions.
Okay.
Michael Arougheti: With over 85 investment professionals located in six offices across Europe, we believe that we have the largest and most direct lending franchise on the continent, managing over 60 billion of the U.M. With our leading alternative credit strategy, Pathfinder II closed approximately 2.2 billion in the third quarter, bringing total commitments to 5.8 billion at quarter end. And as we publicly announced yesterday, Pathfinder II held its final close at its hard cap of 6.6 billion, nearly double the size of the predecessor fund.
At this time, if you'd like to ask a question. Please press Star then one on anti snowfall.
We'd like to withdraw your question. Please press Star then two.
Our first question comes from the line of Craig Siegenthaler with Bank of America. Please proceed with your question.
Yeah.
Good morning, Mike Jared hope everyone's doing well.
My first question is an update on the formation of bank partnerships.
And how Ares is working much closer with banks now on that asset acquisitions, especially in the ABS market.
Michael Arougheti: We experienced significant investor demand hitting our hard cap in only seven months since the first closing. In addition to Pathfinder II, our open and core alternative credit fund raised 750 million in the quarter, bringing total commitments to over 4.2 billion. The strong investor demand for alternative credit strategies is driven in part by filling the gaps created by a pullback from traditional providers, along with the structural changes that we're witnessing in the banking industry.
And I think <unk> west that that purchase in June might've been the last big announcements. So since then have you been forming new partnerships are you seeing the flow of assets pickup from banks.
And what are your expectations for the future.
Your bank partners.
Hey, Craig Thanks for the question.
Pac West, Yes was the largest transaction that we announced but I think the.
Michael Arougheti: With more than 32 billion in AUM, our alternative credit business is a leader in the private, non-rated, and illiquid segment of the asset back market and its poised for growth in what we believe is at least a $4 trillion global addressable market. In Asia credit, we raised nearly $400 million in the quarter, including an approximate $200 million final close in Aries SSG Capital Partner 6, bringing final commitments to 2.4 billion, including a side card fund.
The press picked up some recent activity to where we did a very significant strategic risk transfer a couple weeks back with.
A regional bank.
There is about two trillion dollars of consumer loan asset sitting on bank balance sheets that are going to need to get addressed in some form or fashion not to mention.
Some of the challenges that we expect will continue to we'll continue to see in the real estate books.
So given that we just had our final close on the Pathfinder funded $6 6 billion.
Michael Arougheti: We're seeing strong economic trends and robust corporate earnings growth in India and Australia, which account for 60% of our investments across the region. We're seeing a growing opportunity set for financing solutions for sponsor led acquisitions in these markets. Within real assets, we raised more than $500 million in a European real estate debt mandate, which now totals over $1 billion, and we anticipate that this strategy will continue to grow. Our real estate debt business now exceeds $11 billion, and we believe the team is well positioned for further growth due to investor demand and the current acute need for capital in the industry.
And given that Thats, where the bulk of this activity is going to reside we're still pretty optimistic that the opportunity to partner with banks is still in the early innings and that we're well positioned for it.
And just as my follow up similar question, but more on the investing side.
On asset backed finance on the $7 billion Pathfinder Fine then I know this vertical now has 32 billion at areas, which is very large.
What are the verticals is as Joe and team focusing on now are there any that they're.
They are avoiding.
And looking at areas capabilities today at ABF.
Michael Arougheti: Our second climate infrastructure fund raised another $200 million in the quarter, plus an additional $300 million in October. And this completed the fund's first close with total equity commitments of nearly $1.1 billion, or approximately 80% of the total equity commitments in the prior fund vintage.
Are you broadly broadly fill all of the verticals that are still some white spaces, where you could add investment professionals to sort of fill in in the future.
Without getting into too many specifics Greg I think the good news is we have probably one of the biggest and broadest teams in this space, particularly around the sub investment grade part of the market.
Michael Arougheti: We currently have over 30 funds in the market, and by year end, we expect to have first closes in our seventh corporate private equity fund, our inaugural credit secondaries fund, and our third infrastructure secondaries fund. As well as additional closings in our larger funds, such as our fourth US opportunistic real estate equity fund, our second climate infrastructure fund, and our sixth European direct lending fund as just discussed. Through the end of October, we have now raised nearly $58 billion, and we expect total fundraising for the year to exceed $65 billion. Well ahead of the $57 billion we raised last year.
We think requires it.
We're focused on now.
We talked about a.
Resolution of some consumer loan portfolios and lender finance portfolios within the banking system.
Michael Arougheti: Throughout next year, we have several of our largest fund series expected to hold first closings for successor funds, including our six infrastructure debt fund, our third special opportunities fund and our third US junior direct lending fund. While our core fundraising continues to be supported by expanding within the global institutional market, our strategically important insurance and wealth management channels are also poised for growth. Our affiliated insurance business, Aspita, continued its organic growth with new assets of more than one billion, bringing total AUM to $10.6 billion by quarter end.
In a recent newsletter that that team put out.
There was a pretty good discussion I thought on the opportunity in NAV lending.
About $100 billion opportunity.
So I'd say broadly speaking you want to be in a position to move between markets and geographies as the opportunity set develops and they are very few people, who can make those types of relative value decisions the way that our our team can but.
Sure.
Yes, I think for the time being we are going to be focused on much of the core things that we've been talking about around bank partnerships and lender finance.
Thank you Mike.
Michael Arougheti: We believe investors are attracted not only to areas as credit investing expertise, but also the technological advantage that Aspita is bringing to the community market. Our growth outlook is promising as we're seeing demand for new annuities, re-insurance flow and opportunities for block trades, which we would expect to fund largely with third party capital.
Our next question comes from the line of pallets.
Women sacks. Please proceed with your question.
Hey, good morning, guys.
Question for you outside of credit maybe just a quick refresher on the opportunities you guys see for fundraising over the next call. It six to 12 months in things like private equity and in other verticals.
Michael Arougheti: We believe that we are on track to meet or exceed our goal of reaching 25 billion or more in the AUM by the end of 2025. Within wealth management, our ongoing objective is to market a limited number of core semi-liquid institutional quality products through our global wealth management channel. We're well on our way to accomplishing this over the next several years, and today we're one of the largest alternative managers in the wealth industry with over 120 professionals, a footprint across North America, Europe and Asia, six products and relationships with nearly every major wirehouse and private bank.
So maybe we could start there.
Sure. Thanks for the question out as we've talked about on prior calls I think the good news is as year over year youre going to see less.
Yes dispersion in fund raising outcomes largely because we have an increased number of larger flagship and core vehicles. Obviously, we're building momentum in the wealth channel and the insurance channel and then the family of open ended products that are on continuous offer growing so.
We're going into any given year, just with a much higher floor to jump off of with the large institutional flagships as we've talked about in the prepared remarks, we will clean up.
Michael Arougheti: We expect to continue adding strategic partnerships and gain market share as we scale each one of these products. After launching our non-traded BDC ASIF, primarily on one wirehouse in June, it has seen steady momentum with approximately $550 million raised in the first three months, including the September flows which closed on October 1st, bringing total AUM to over 2.7 billion. There are four additional global platforms that we expect will add ASIF in the first half of 2024.
The large credit funds here towards the end of the year and into the first half of next year.
And then we would expect to see first closes towards the end of this year into the beginning of next year for our seventh.
Corporate private equity fund, our sixth infrastructure debt fund.
Our climate infrastructure fund, so on and so forth.
And then the big things on the Horizon I think for next year are going to be our third special Ops Fund our third junior debt fund.
Michael Arougheti: And despite a tough market for real estate fundraising, we continued to see net aggregate flows collectively across our two non-traded REITs, including the 1031 exchange programs. Turning to deployment, we invested $16.7 billion in the third quarter, which was up from the $15.2 billion in the second quarter, but down from $18.3 billion in the third quarter of 2022. We're beginning to see signs of large deal activity returning, as Q3 was the third highest quarter for $1 billion plus unitronch deals financed by the private credit markets.
Probably the two the two big ones.
And then obviously, we'll be growing into our six infrastructure debt fund. So it's interesting that as the product set is growing and diversifying and we're showing that we can scale vintage over vintage.
We're no longer in this world, where we're just focusing on a handful of.
Flagships and you can see that just in terms of the quarter over quarter fund raising performance and I'd expect that to continue into the first half as well.
Michael Arougheti: While still early and markets remain slower than we'd like, we're encouraged by our fourth quarter to date investment activity and our pipelines. For 2024, we currently expect market activity to improve due to the aging private equity dry powder that is approaching the end of its investment period, growing pressure from LPs to return capital, stronger sentiment among middle market companies, and further pressure on balance sheets and capital structures as rates they hire for longer.
That helps thanks.
The second question I had for you guys is zoning in on some of the retail initiatives.
Helpful to hear that Asia is going to be I guess on for additional platforms in the first half of next year.
Any lessons learned I guess from the existing platform and how good of a read across that could be.
To some of the other ones that you mentioned given pretty robust momentum we've seen so far and then I think you launched a European version of that as well so maybe help us understand sort of how does the competitive market.
Michael Arougheti: We're also seeing a growing opportunity to partner with the banking sector through our alternative credit business. The bank market continues to be impacted by regulatory changes, asset liability mismatches, and an inverted yield curve, all of which changed the way banks participate in certain segments of the market. Over the years, we've developed extensive bank partnerships where we have the opportunity to provide solutions to augment their existing businesses to improve risk weightings and reduce capital charges while at the same time, generate attractive returns for our investors. Our alternative credit team believes that we're in the early innings of these types of transactions, and we're seeing an increase in our collaboration with our banking partners.
Europe vary versus the U S and the opportunity there you see for the European version of this product relative to the early traction you're seeing in the U S.
Sure just to frame. It so everybody is looking at the same numbers, we raised in our wealth products alone are not looking at our traded product wealth product. We did about $1 7 billion in the third quarter, obviously with good momentum on ace it with only the one platform I would expect.
Alex just given the.
Attractiveness of the product at this moment in time, and our BDC track record and leadership in private debt that adding those platforms is a pretty good read across.
Michael Arougheti: Finally, we continue to explore inorganic growth opportunities to expand our business through both product and geographic expansion.
We'll know it when we're in those platforms just how much they scale, but I think there is a pretty significant amount of pent up demand and a respect for the brand in that channel and so.
Michael Arougheti: In October, we closed on the acquisition of Crescent Point, a leading Asia-focused private equity firm with three points $7 billion in assets under management. The Asia-Pacific region is a key geographic target for us, and we continue to look at various ways to expand each of our business lines into that region, either through organic team builds or strategic acquisitions.
I think thats a good starting point to expect that it would be a good read across <unk>.
Europe, it's interesting because the European wealth market generally is less developed so we just don't have a great amount of precedent to know.
But from a competitive standpoint, we have by far the leading private credit franchise in that market. Both in terms of length of track record scale of capital in size of team. So it's an interesting you have a less mature distribution channel, but we have a signet significantly better competitive positioning I think.
Michael Arougheti: And as you may have seen, we also recently closed a strategic partnership and investment in Vinci partners, a leading alternative asset manager in Latin America. We've known the Vinci team for over a decade and are excited to collaborate on distribution, product development, and other business opportunities in Brazil and across Latin America. We believe that the Latin American markets are in the very early stages of shifting capital into the private markets, particularly within private credit. This is similar to the trends that we saw in the early 2000s in Europe, and what we're seeing now beginning to play out in the APAC region.
Relative to others in that market and so the two combined hopefully has us having similar experience with that product as we are having with the U S product.
Great. Thank you very much.
Okay.
Our next question comes from the line of Ben <unk> with Barclays.
With your question.
Hi, good morning, and thanks for taking the question I wanted to ask about some of the LP dynamics, we've been seeing some reports in the media not about area, specifically, but about private credit in general things like investors sort of asking for lower hurdles pricing concessions. We have seen some competitors can see incentive fees and some other credit funds just curious if there's anything you're seeing in your interactions.
Michael Arougheti: We'll continue to look for unique and attractive global growth opportunities for our business.
Jarrod Phillips: And now I'd like to turn the caller over to Jared for comments on our financial results. Jared? Thanks, Mike.
Jarrod Phillips: Hello, everyone. Thanks for joining us today. In the third quarter, we continue to see strong growth in our management fees, fee-related earnings, AUM, and fee-paying AUM compared to the third quarter of 2022. While realizations were light in the third quarter as we expected, we have a clear line of sight on stronger fourth quarter realizations due to our European-style waterfall funds. We're also on track to recognize a meaningful year-over-year increase in FRPR from our credit funds, as I will discuss.
With your clients that are similar to what we've been hearing elsewhere.
We are absolutely not seeing that in any way shape or form I would not read into that at least vis vis our platform or the market generally I would maybe just make a comment that to the extent that someone was trying to play catch up in a growing market without a long track record of performance.
Jarrod Phillips: Starting with AUM, we ended the third quarter with $395 billion of AUM, and we're tracking well to meet or exceed our target of $500 billion or more by the end of 2025. Our FPA AUM grew to over $247 billion, up from over $218 billion this time last year, driven by deployment across our credit and special opportunity funds and new commitments to funds in our real assets group. For the first time in our firm's history, we have over $100 billion in dry powder, of which over $65 billion is AUM not yet paying fees and available for future deployment.
You might have to cut fee in order to attract capital, but that has not been our experience in one bit.
Alright.
That's very clear maybe a one follow up just thinking I know the speed. It is not a huge portion of your business, but thinking about the expected Dol proposed rule today. The updated fiduciary rule can you just remind us what is your sort of overall annuity exposure how much of the business is or how much of your growth prospects are sort of reliant on that channel.
And what are sort of the makeup of the speed at today.
Sure and we appreciate your hiring and obviously this is all unfolding real time, so we're digesting that.
Jarrod Phillips: Upon deployment, this would generate nearly $650 million in incremental management fees, and position us for continued FRE growth and margin-efficient, from a revenue perspective, our management fees totaled over $643 million in the quarter and increase of 17% compared to the same period last year, primarily driven by deployment of our available capital and our credit group. Other fee income of approximately $20 million was down from the prior period is there were certain episodic transaction fees that contributed to our second quarter's results.
The same way that you are we have as we've said before it's taken a more measured approach to the growth of our insurance affiliate that some of our peers.
<unk>.
We believe in the investment thesis of asset expertise married with insurance company balance sheets, but continue to have a very large and growing stable of important insurance partners and our third party business and continue to grow that part of our company as well.
Our speed. It today has raised close to $1 billion of capital and the total AUM. There is about 11 11 billion and $10 6 billion.
Jarrod Phillips: As it relates to FRPR in 2023, we continue to expect approximately 95% of our FRPR to be realized in the fourth quarter. Currently, the potential FRPR from our credit funds is tracking well ahead of last year as we're experiencing the benefits of a higher for longer interest rate environment, along with a modestly positive impact on loan pricing from tighter credit spreads. We're currently estimating FRPR from our credit funds of approximately $110 to $120 million for the fourth quarter or $40 to $40 million, $44 million of FRE after compensation expenses.
About 60% of that balance sheet is advised and sub advised by areas as one would expect.
You go back to our Investor day in the summer of 2021, when we put forward our guidance Youll see that we largely expected that is speed it would grow roughly $5 billion a year to get us to 25 billion of AUM at the end of 2025. So if you looked at the 500 billion that we put out for <unk>.
<unk> 25 billion for a speed that would have it at about 5% of our assets and if you look at where we are on that business plan, we're kind of tracking to that.
Jarrod Phillips: I will caveat that this is still subject to the total return performance of these credit strategies for the full year, including changes in market values in the fourth quarter. Regarding FRPR from our real estate group as of September 30th, the two non-traded reads had not accrued any incentive fees on their balance sheets. Given the upward pressure on cap rates, we do not expect to recognize FRPR from these non-traded reads in 2023.
So I would expect that we will continue to grow that in a measured fashion.
We do think that we have some technological advantages in terms of the way that we are originating and onboarding, new business and I think as many folks know.
Jarrod Phillips: And earning FRPR in 2024 from these reads may require an improvement in the current valuation environment. Few related earnings totaled $274 million and increased of 18% from the third quarter of 2022 driven by higher management fees from deployment. For the year-to-date period, we're tracking it over 20% growth in FRE. We remain confident in our ability to generate 20% or better FRE growth annually through 2025, excluding any FRPR from our non-traded reads as we discussed on our call in February.
We're obviously smaller but we also do not have any legacy exposures given that this was a de novo build and so when you look at what is in the book, it's all effectively new vintage new vintage credit.
So we'll keep an eye on this.
Yeah.
But again I think the good news is for at least for areas.
A small part of what we do and my expectation is that whatever develops here like we've seen in the past it will largely hopefully be around enhanced disclosures.
Around certain products from the channel, but not not really a change to the economic proposition to the client.
Jarrod Phillips: Our FRE margin in the third quarter was 41.2%, a roughly 40 basis point improvement from the second quarter of 2023, and a 100 basis point improvement from the year ago period. As we have said in the past, we expect to see a gradual expansion in margins that could accelerate in periods of higher deployment and corresponding growth in FPA UN. As a reminder in the fourth quarter, we typically see a drag on our FRE margins related to FRPR which are typically in the mid 30% range.
Got it I appreciate all the color thanks, Mike.
Thanks.
Our next question comes from the line of Brennan Hawken with UBS. Please proceed with your question.
Good morning, Thanks for taking my question I know real estate is small for you, but could you maybe give some color on where the cap rates are in your non traded Reits and maybe how much those have changed versus a couple of years ago. You had spoken to the rent growth there is an offset but just.
Jarrod Phillips: Excluding this FRPR impact, we do expect continued modest FRE margin expansion in Q4 and we remain confident in our ability to reach a 45% run rate FRE margin by the end of 2025. Our realization activity was slower in the third quarter due to limited American style realizations and several of our equity strategies coupled with the typically slow third quarter for European style waterfall realizations as discussed on our last call. Given the early ages of many of our European waterfall style funds, we typically see tax related distributions in the fourth quarter with a clean up amount in the second quarter related to tax filings. However, as our 2017 and 2018 vintage European waterfall style funds continue to season, we expect to see larger and more consistent European waterfall realizations likely begin in 2025 and their app.
Kind of curious about the base cap rates.
Good morning.
Yes.
Bill do you want to take that one.
I thought bill Benjamin our head of real estate was on I'm happy to take it.
If you look at the non traded Reits.
For Q3 this year when you look at what's underpinning the evaluation, we had cap rates roughly five 5% five 6% depending on the vehicle.
If you go back a year, we were probably 50 to 70 basis points tied of that $4 eight and $5. Two so we have seen cap rate expansion, but as we mentioned given that these funds are largely focused either exclusively on.
Jarrod Phillips: Carter. For the fourth quarter, we currently expect approximately $45 million in European Waterfall Style Net Realized Performance Income. Looking forward, our potential net performance see income from European Style Funds has increased from $2.5 billion earlier in the year to $3.5 billion. This potential amount has continued to grow as we raise additional European Style Funds along with a compounding effect of higher interest rates in our credit-like funds. At the same time, we're seeing the duration of these expected cash flows extend out as their fewer repayments and less overall transaction activity.
Industrial logistics properties and multi is we are continuing to see pretty significant and healthy fundamental performance in terms of NOI growth and the development of the rent rolls.
Excellent thanks for that.
And then kind of curious about on the European waterfall and expectations for 2024, I believe you said $160 million.
But.
I thought that on the last call that was more like about 175 with the potential for upside so am.
Am I remembering that correctly and could you maybe walk through what happened to that revision and how we should be thinking about upside and what could drive that from here.
Jarrod Phillips: The extended fund duration has a positive compounding effect on the total realization value as the investments remain in our portfolio longer, but it impacts the timing of these realizations. Based on our updated estimates and including the fourth quarter guidance I've provided, we currently expect approximately $80 million of net-realized performance income in 2023 from our EU Waterfall Funds and about $160 million in 2024. Our initial view is that there's more than $250 million in 2025.
Sure I'll take that one.
Yes.
What we tried to lay out and we added the 2025 guidance with a little bit more clarity kind of splitting up the periods between 'twenty four and 'twenty five.
Based on the current market environment, what we're seeing is a little bit of the extension of the duration of the underlying assets of these funds, which means that it pushes out the overall maturity of the fund a little bit.
Jarrod Phillips: Our net accrued performance, receivables, is at $969 million, up 9% from the year ago period despite nearly $150 million in distributed net-realized performance income over the last 12 months. Notably, approximately $94 million of this increase comes from our credit funds, where we're seeing the benefits of higher interest rates above our fixed hurdle rates. Unlike equity style funds where increases in performance fees are based on capital appreciation driven by market multiples and EBITDA growth, our eligible credit funds can generate more predictable income from net returns after any credit losses above six hurdle rates with limited market risk.
Actually ends up being a net positive for us in terms of these are assets. These are credit assets that are yielding well above the hurdle, but because of the current market environment. They actually arent refinancing quite as early as they used to that's what's pushing out that duration. So ultimately what we're seeing is a build.
Over.
A longer period of time with now we're expecting it more to land in that 2025 period as opposed to towards the end of 2024 and Thats a little bit of what we've seen happen here in Q4 as well as we're expecting kind of a push of some of that.
Jarrod Phillips: For example, of the $969 million of net accrued performance receivables, $694 million or over 70% were in European style Waterfall Funds with over 500 million in private credit like funds. We now have nearly $125 billion or over 50% of our incentive eligible AUM in European style Waterfall Funds and we expect this balance will continue to grow. Realized income in the third quarter till the 264 million and after tax realized income per share of class A common stock was 83 cents, up 11% compared to the third quarter of 2022.
In terms of what we've given as guidance in the past into 2024, and then some of that 2024 really extending into 2025, so I wouldn't really call. It a.
Loss of it it's actually a build and a larger build but it's pushing it up just a little bit due to the current market environment.
Got it and is it possible for that duration to continue to get extended if we see.
Conditions remain challenging for refi or is that Mike.
Realistic worst case right.
Right now.
Yes, not too much because we're really approaching the natural maturity of a lot of those assets.
Jarrod Phillips: As Mike mentioned earlier, approximately three quarters of our primary investment strategies performed well compared to their respective relative public indices or exceeded their annualized target returns for the third quarter. With particular strength across US direct lending, alternative credit, Asia credit, infrastructure debt and special opportunities. In credit, all of our primary investment strategies have generated double-digit gross return in the last 12 months as we continue to benefit from higher base rates, attractive spreads, low defaults and strong fundamental performance.
It's really just in terms of what the refi activity looks like and if the market picks up well that could all cause refinances in turnover in those earlier portfolios.
We then accelerate the recognition of that so it's really just a matter of what is the exact timing we know what the total amount could be the total amount continues to grow its when that will perfectly occur.
Kind of arbitrary dates along the way.
Got it thanks for walking me through that.
Yes.
Okay.
Jarrod Phillips: Our credit metrics remain strong across our portfolios. As an example, the US direct lending, Aries Capital Corpse, Nonacruals at cost declined to 1.2%, which remains well below our historical average and industry averages. And portfolio company EBITDA growth remains in the healthy mid to high single digits for our US and European direct lending portfolio. Loan DeValue Ratios, also remain attractive in the low 40% range in the US and mid 40% for a European portfolio.
Our next question comes from the line of Ken Worthington with JP Morgan. Please proceed with your question.
Hi, good morning, and thank you for taking the question.
Maybe first on the fund raising guide I think the your comments Youre on track for 65 billion. This year.
Suggests a.
Reasonably reasonable slowdown in <unk>.
Fourth quarter commitments is that just you being conservative or did some funds that you expect in <unk>, maybe get pushed to <unk>.
Jarrod Phillips: In private equity, both of our investment strategies performed well compared to the public equity markets in the third quarter, and we continue to see double-digit EBITDA growth across our Acoff portfolio. Within real estate, higher cap rates are offsetting the relatively strong rent growth that we're seeing in our portfolios, which are heavily weighted toward the more resilient industrial and multi-family sectors. This is leading to muted returns for the third quarter, yet due to our significant overweight in these strongest performing sectors of industrial and multi-family, which count from more than 75% of our real estate growth value, our US and European real estate strategies have performed well relative to the respective public real estate markets over the past two years.
Can you give us a little more flavor there.
Yes, I think we said in excess of 65, Ken just because.
When you get into the end of the year you have certain things that will either be pulled forward or or roll. So I think we're just trying to be.
Cautious given that some things may slip, but the funds that we've articulated are all in the process of having their closes here in.
In the fourth quarter, one or two may slip one or two may not and that's really going to drive the ultimate.
The ultimate change, but there is nothing other than timing.
Affecting affecting what the ultimate outcome is going to be.
Okay, great I sort of figured that.
Hi, <unk>.
Alt credit I think there has been talk of a rush of deals to come before year end.
Michael Arougheti: With that, I'll turn the call back to Mike for closing remarks. Great. Thanks, Jared.
Is that what you're expecting and what's driving this push into year end.
Michael Arougheti: In our view, the long-term secular drivers for our business remained very much intact. Both institutional and retail investors continue to seek out higher risk adjusted returns in less volatile and uncarrelated alternative assets. At the same time, we're seeing traditional capital providers and banks continue to retrench for a whole host of reasons. And areas continue to play a key role in filling the gaps and providing solutions into these markets. As you saw with our performance today, as well as past market cycles, we can generate strong growth even in tougher market environments.
I think the pipeline there is building significantly is probably one of the busiest parts of the firm right now.
A lot of this is Basel and game driven and.
I think just folks trying to get focused on balance sheet composition and construction going into the end of the year.
I don't think theres anything more than that but we are absolutely experiencing that the pipeline is building transaction activity. There is probably turned on more so than.
Other parts of the firm right now.
Michael Arougheti: We continue to make investments for future growth by enhancing our product capabilities in adjacent areas, expanding into new geographies and deepening our distribution channels. With a record amount of dry powder, we're well positioned to invest our capital opportunistically in highly attractive sectors. And because of the scaling of our private credit business over the past six years, we're in a great position to realize a growing amount of performance income in the coming years from our European style waterfall funds. All of this is to say that we have strong visibility on continued earnings growth, dividend growth, and margin expansion.
Okay, great. Thank you very much.
Okay.
Our next question comes from the line of Michael Cyprus with Morgan Stanley. Please proceed with your question.
Great. Good morning, Thanks for taking the question maybe just on commercial real estate I believe in the past you've mentioned that you would expect the bulk of the primary market opportunity out of the regional banks to come from CRE lending. So I guess, how much activity have you seen so far on the CRE lending front, what steps might you need to take to enhance the platform if at all in <unk>.
A hiring or build outs in order to best capture the market opportunity set that you guys see.
Michael Arougheti: As always, I'm grateful for the hard work and dedication of our team around the globe. And I'm appreciative of our investors continuing support for our company.
Thanks, Mike, Yes, I don't think that we need to do a lot more than we're currently doing we have a very well developed team both in the U S and in Europe, we have been building capability in Asia.
Unknown Executive: And operator, I think we can now open up the line for questions.
Asia Pacific as well as we highlighted on our prepared remarks, we have been forming capital.
And we'll continue to do so I think when you think when you think about what's going on in the world of commercial real estate and the change in basis most of the exciting stuff is going to be happening.
Top to middle part of the balance sheet of these entities and that's going to be a combination of real estate lending solutions real estate secondaries structured equity through our opportunistic real estate business and obviously, we have large teams against all three of those so I think the bigger issue is really going to be.
Unknown Executive: At this time, if you would like to ask a question, please first star then one on your touchtone phone. If you would like to withdraw your question, please first star then two.
Craig Siegenthaler: Our first question comes from a lot of Craig Seaton, David with Bank of America. Please proceed with your question.
Investor behavior, because as much as everybody appreciates how big of an opportunity that is you have a lot of investors that are also playing defense within their existing exposures and until they kind of get their heads around what it is that they currently own I think it's going to be a little hard for them to get on offense. So I think for me, it's really going to be.
Michael Arougheti: Good morning, Mike Jared. Hope everyone's doing well. My first question is an update on the formation of bank parts. Partnerships and how Ares is working much closer with banks now on asset acquisitions, especially in the ABF market. And I think Pac-West that purchase in June might have been the last big announcement. So, since then, have you been forming new partnerships? Are you seeing the flow vast that's picked up from banks? And what are your expectations for the future with your bank partners?
All on the capital side not the capability side.
Okay. Thanks, and just a follow up question wanted to circle back to your comments on deployment I think you've mentioned that you were encouraged by the activity. So far here in the fourth quarter and the pipeline I think you mentioned alternative credit busiest part of the firm just wanted to double click on that if you could maybe just elaborate a little bit more pick it picked up.
Michael Arougheti: Hi, Craig, thanks for the question. Pac-West, yes, was the largest transaction that we announced, but I think the press picked up some recent activity to where we did a very significant strategic risk transfer a couple of weeks back with a regional bank. There's about $2 trillion of consumer loan assets sitting on bank balance sheets that are going to need to get addressed in some form or fashion, not to mention some of the challenges that we expect will continue to see in their real estate books.
In the third quarter here, but what's the opportunity set for the deployment activity to broaden out beyond alternative credit beyond credit into some of the other areas of the firm and how do you see deployment activity evolving as you look out over the next 12 to 24 months. So maybe you could just remind us around some of the seasonality does that probably pick up in <unk> and then slowdown in the <unk>.
Quarter.
Sure.
I'll try to hit this from a couple of different places number one I think given the diversity of strategies that we have similar to my comments on fundraising I'll make a similar commentary on deployment, which is when you look at the deployment experience Youll see obviously.
Michael Arougheti: So, given that we just had our final close on the Pathfinder Fund at $6.6 billion, and given that that's where the bulk of this activity is going to reside, we're still pretty optimistic that the opportunity to partner with banks is still in the early innings and that we're well positioned for.
Obviously, a slowdown but on a relative basis still healthy deployment. So if you look a year ago.
Q3, 2022, we deployed about $18 3 billion odd.
Obviously led by credit.
Michael Arougheti: And just as my follow-up similar question, but more on the investing side, focusing on asset-backed finance and the $7.00 billion Pathfinder Fund. And you know, I know this vertical now is 32 billion areas, which is very large. What verticals is Jolene team focusing on now? Are there any that they're avoiding? And looking at areas as capabilities today in ABF, you know, are you broadly fill all the verticals? Are there still some white spaces where you could add investment professionals to sort of fill in in the future?
And in Q3, 'twenty three we deployed $16 7 billion and that was up from $15. Two last quarter. So you kind of begin to see these ranges emerge if you look at it on an LTM basis.
LTM this year about 66 billion LTM last year about $90 billion. So obviously, if we get into a market, where we're seeing heightened transaction activity that also gives you another way.
The way to think about the range of outcomes.
And then just measure that against the $100 billion of dry powder that we referenced earlier and we'll give you a general sense for where we are.
Michael Arougheti: Without getting into too many specifics, Craig, I think the good news is we have probably one of the biggest and broadest teams in the space, particularly around the sub-investment grade part of the market, which we think requires a... We're focused on now. We talked about resolution of some consumer loan portfolios and lender finance portfolios within the banking system. In a recent newsletter that that team put out, there was a pretty good discussion I thought on the opportunity in NAV lending, which is about $100 billion opportunity.
From a deployment opportunity standpoint, as we deploy that dry powder.
Most of of of.
What is happening now and this goes back to what I just talked about with real estate is going to be in and around the opportunistic side of the business.
Eschew lending.
Opportunistic refinancings secondaries structured equity et cetera, because the new issue volumes both in corporate.
Private equity and institutional real estate or are slow and we continue to have a competitive advantage given our incumbency and the size of our portfolio. So if you look at our U S and European direct lending portfolio as Youll see.
Continuing 40% to 50% of deal volume at areas is coming from the installed book of business and so Thats a nice.
Ballast as you think about the ability to deploy into a.
Michael Arougheti: So I'd say broadly speaking, you know, you want to be in a position to move between markets and geographies as the opportunity set develops. And there are very few people who can make those types of relative value decisions the way that our team can. But yeah, I think for the time being, we're going to be focused on much of the core things that we've been talking about around bank partnerships and lender finance.
A tougher new issue market.
I am optimistic that that transaction volume will pick up we're seeing it build in.
In the pipelines if you talk to the sell side they'll tell you that there is significant pent up demand.
For asset sales to be coming to market.
We're seeing it across the platform, but the math of it. If you just look at for example, private equity and you say today buyout funds are sitting on about $2 eight trillion dollars of unergative assets relative to about $1. One trillion dollars of dry powder and if you look at that install.
Craig Siegenthaler: Thank you, Mike.
Alex Goldinsak: Our next question comes from the line of Alex Goldinsak, please be with your question. Hi, good morning, guys. My question for you outside of credit, maybe just a quick refresher on the opportunities you guys see for fundraising over the next, call it six to 12 months in things like private equity and other verticals, so maybe we can start there. Sure, thanks for the question. As we've talked about on prior calls, I think the good news is, is year over year you're going to see less dispersion and fundraising outcomes, largely because we have an increased number of larger flagship and core vehicles.
Base or the aging of it 50% of the companies that are currently owned by buyout funds or had been owned in excess of four years and so if you just think about the weight of that money needing to transact and return capital to Lps, while most of what we're doing is kind of on that opportunistic side I still believe that youre going to see new.
<unk> volumes pick up, particularly now that youre getting into it.
Stabilized rate environment.
Great. Thank you.
Our next question comes from the line of Patrick.
Alex Goldinsak: Obviously, we're building momentum in the wealth channel and the insurance channel and then the family of open-ended products that are on continuous offer or growing, so we're going into any given year just with a much higher floor to jump off of with the large institutional flagships. As we talked about in the prepared remarks, we'll clean up the large credit funds here towards the end of the year and into the first half of next year.
Economists research. Please proceed with your question.
Okay.
Hi, Thanks for the questions a quick follow up on that one.
It's the cadence of the pipeline building more about 2024.
Should you expect to pick up more.
More immediately in <unk>.
I think Q4 is shaping up nicely.
Again, it's always there's always a seasonal pickup in Q4 as people rush to get deals done by year end typically just around tax planning and closing out the year. So.
Alex Goldinsak: And then we would expect to see first closes towards the end of this year, into the beginning of next year for our seventh corporate private equity fund, our sixth infrastructure debt fund, our climate infrastructure fund, so on and so forth. And then the big things on the horizon, I think, for next year are going to be our third special ops fund, our third junior debt fund, are probably the two big ones, and then obviously we'll be growing into our sixth infrastructure debt fund.
There's always a flurry of activity towards the end of the year.
Sometimes that slip sometimes it sometimes it doesn't but I would expect that it will be a nice nice ramp through Q4, and then into Q1, just based on everything I am saying.
Okay, Great and then.
Level question. There was rating agency out last week will report showing large direct lending deals increasingly coming with no maintenance covenants. Okay trying to argue that there's more pressure to converge terms with the broadly syndicated market I'm not sure how they even know that given these are private deals, but is that a trend you're seeing as areas participating.
Alex Goldinsak: So, you know, it's interesting, as the products set is growing and diversifying and we're showing that we can scale vintage over vintage, we're no longer in this world where we're just focusing on a handful of flagships and you can see that just in terms of the quarter of a quarter fundraising performance, and I'd expect that to continue into the first half as well.
And if so what is the argument I guess for lowering your protections.
Yes, I don't I don't really know to your point I don't know where thats coming from.
No.
And you can't paint the entire private credit.
Michael Arougheti: Great, that helps, thanks. The second question I had for you guys is zoning in on some of the retail initiatives, helpful to hear that ACIF is going to be, I guess, on four additional platforms in the first half of next year. Any lessons learned, I guess, from the existing platform and how good of a read across that could be to some of the other ones that you mentioned, given pretty robust momentum, we've seen so far.
Market with the same brush I'll make a couple of comments I do think that in some of these private executions that are.
Syndicated loan proxies, one would expect that some syndicated loan documentation terms would find their way into the private market that to me is not really newsworthy or noteworthy.
Michael Arougheti: And then I think you launched a European version of that as well, so maybe help us understand sort of how does the competitive market in Europe vary versus the US and the opportunity there you see for the European version of this product relative to the early traction you see in the US. Sure, just to frame it so everybody's looking at the same numbers, we raised in our wealth products alone, so not looking at our traded product, wealth product, we did about 1.7 billion in the third quarter, obviously with good momentum on ACIF with only the one platform.
<unk>.
In the core middle market that is not the case.
The <unk>.
Structures continue to be strong there as good as we've ever seen.
The pendulum has swung to be obviously more lender friendly than borrower friendly.
So it feels a little sensational but.
And I would expect that that will continue.
The other thing I would just point out if you actually go back and look at the history of Covenant light loans.
There is no evidence to say that covenant light loans actually performed worse than covenant did loans and I think the reason is twofold. One the best quality credits are those that can actually command better structures and number two sad as it as it may be oftentimes in.
Michael Arougheti: I would expect Alex just given the. Attractiveness of the product this moment in time in our BDC track record and leadership and private debt that adding those platforms is a pretty good read across, you know, we'll know it when we're in those platforms just how much they scale but I think there's a pretty significant amount of pent up demand and respect for the brand in that channel. And so, you know, I think that's a good starting point to expect that it would be a good read across Europe, you know, it's interesting because the European wealth market generally is less developed, so we just don't have a great amount of precedent to know.
<unk> structures.
Many of the participants in this indicates a different structural constraints or agendas and so when you get into a restructuring conversation you may have a CLO that can't put new money in or can't take <unk>.
Ratings downgrade you may have.
Credit fund that is at the end of fund life and can participate in a junior security and so there's all sorts of friction that you see in those syndicated loans that frankly, when you have no covenants.
Michael Arougheti: But from a competitive standpoint, we have by far the leading private credit franchise in that market, both in terms of length of track record, scale of capital and size of team. So, you know, it's an interesting, you have a less mature distribution channel, but we have a significantly better competitive position here, I think relative to others in that market. And so the two combined, you know, hopefully has us having similar experience. With that product as we're having with the US product.
Protective of value and I think Thats fight you could argue pretty strongly that covenant light loans for the best borrowers will actually outperformed thats actually what we saw happen through the GSC.
Michael Arougheti: Great.
I'd make one last comment which is why I think everybody is so excited about private credit relative to.
Ben Budish: Thank you very much.
The traded credit at least vis vis the defaults and loss given default. When you are in a private credit instrument covenant did or not covenant did it's a bilateral agreement between a borrower and the lender or a very small lender group and there is no ability for anyone else in the market with a different agenda.
Michael Arougheti: Our next question comes from the line of Ben, a Buddhist with Barclays. We will see what your question. Hi, good morning and thanks for taking the question. I wanted to ask about some of the LP dynamics. We've been seeing some reports in the media, not about areas specifically, but about private credit in general, things like investors sort of asking for lower hurdles, pricing confessions. We've seen some competitors can see intensities and some of their credit funds just curious if there's anything you're seeing in your interactions with your clients that are similar to what we've been hearing elsewhere.
Or a different entry point to come into that security and destroy value.
And oftentimes in the traded market, obviously, you can see people coming into capital structure and being disruptive in a way that you just don't see in the private market. So even in the absence of covenants.
<unk> performed differently, because you restructure them through a bilateral negotiation between borrowing lender in.
Michael Arougheti: We are absolutely not seeing that in any way, shape, or form. I would not read into that at least vis-a-vis our platform or the market generally. I would maybe just make a comment that to the extent that someone was trying to play catch-up in a growing market without a long track record of performance, you might have to cut fee in order to attract capital, but that has not been our experience in one bit.
The deals that are getting done are no different than what we've seen for the last 30 years.
Makes sense. Thank you.
And our next question comes from the line of Mike Brown with <unk>. Please proceed with your question.
Okay.
Great I just wanted to follow up on the European waterfall fund dynamic so.
Jeremy It sounds like the the amount that you guys are guiding to for the cumulative 2024, and 2025 period would be about in line with the base estimate that you had talked about in the past you did talk about the potential for high estimate of 650 previously if I recall correctly. So.
Michael Arougheti: All right, that's very clear.
Michael Arougheti: Maybe one follow-up, just thinking, I know the speed is not a huge portion of your business, but thinking about the expected DOL proposed rule today, the updated fiduciary rule. Can you kind of just remind us what is your sort of overall annuity exposure? How much of the business is, or how much of your growth prospects are sort of reliant on that channel and what is sort of the makeup of a speeder today?
Should we just assume that that perhaps has been pushed out based on some of the duration commentary that you talked about or does that high estimates still hold and it's just a matter of the range is still somewhat wide and timing is still relatively uncertain at this point.
Michael Arougheti: Thanks. Sure, and we appreciate your hiring, and obviously this is all unfolding real-time, so we're digesting that the same way that you are. We have, as we've said before, taken a more measured approach to the growth of our insurance affiliate that some of our peers. We believe in the investment thesis of asset expertise married with insurance company balance sheets, but continue to have a very large and growing stable of important insurance partners in our third-party business and continue to grow that part of our company as well.
I think it's more a case of that.
In terms of.
Looking at the overall.
Environment again, as I mentioned earlier in the call.
If we start to see repayments happened faster well, if youre going to come closer to that higher end of the range. Because you are pulling a lot of that up we're trying to be as accurate as we can with that lower end of the range, but yes, I wouldn't say that there isn't really a change to the range that the good news is as I mentioned earlier again is it the accrued balance continues to grow and this is actually an advantageous.
Michael Arougheti: A speeder today has raised close to a billion dollars of capital, and the total AUM there is about 11 billion, 10.6 billion. That's 60% of that balance sheet is advised and sub-advised by areas, as one would expect. If you go back to our investor day in the summer of 2021, when we put forward our guidance, you'll see that we largely expected that a speeder would grow roughly $5 billion a year to get us to 25 billion to the AUM at the end of 2025.
For that to be occurring in terms of extending the duration.
Okay, great. Thanks for that clarification.
And I guess the credit metrics. They are just continuing to hold up really well and seem to really be outperforming expectations.
What is what is really kind of driving that strength in Europe and your view here opportunity for areas and then when does the pressure from higher rates on cash flows really start to have a greater impact what would kind of be your outlook here.
On a credit side is if you take out over the next 12 to 18 months.
Michael Arougheti: So if you looked at the $500 billion that we put out for guidance, $25 billion for a speeder, that would have about 5% of our assets, and if you look at where we are on that business plan, we're kind of tracking to that. So I would expect that we will continue to grow that in a measured fashion. We do think that we have some technological advantages in terms of the way that we are originating and onboarding new business, and I think as many folks know, we're obviously smaller, but we also do not have any legacy exposures given that this was a denovo build.
It's funny, because we have not been in the recession camp for quite some time and I think everyone. Just continues to hope for it for some reason, it's just not coming and the simple answer without being cheeky as we just put up a four 5% plus GDP print in the quarter and the economy is really strong.
And we're seeing that play out in our portfolios and we've tried to articulate that one of the benefits that we have given the breath of our platform is that we're seeing private market information roll through on a monthly basis.
Michael Arougheti: And so when you look at what is in the book, it's all effectively new vintage credit. So we'll keep an eye on this. But again, I think that the good news is for at least, you know, for areas, it's a small part of what we do in my expectation is that whatever develops here, like we've seen in the past, it will largely hopefully be around, you know, enhanced disclosures around certain products from the channel, but not really change the economic proposition to the client.
For the most part we're seeing.
<unk> strength there are obviously pockets of the economy that are are weakening there are certain segments of the consumer economy that are weaker but.
Taken in the aggregate it paints a picture of continued economic strength I think kipp and the team have done a good job talking about the credit metrics at ARCC and I'd reiterate they're consistent across the private credit book, but the biggest protection is coming from the <unk>.
Michael Arougheti: Kenneth, appreciate all the color. Thanks, Mike. Thanks.
One to value positioning.
Positioning of those portfolios and the continued growth in EBITDA, which is obviously promoting dollar deleveraging if you look at where those books sit today.
Brennan Hawken: Our next question comes from the line of Brennan Hawken with UBS. Please, we'll see with your question.
Brennan Hawken: Morning. Thanks for taking my question. I know real estate is small for you, but could you maybe use some color on where the cap rates are in your non-traded reads and maybe how much those have changed versus a couple of years ago. Well, you had spoken to the rent growth there as an offset, but just kind of curious about the base cap rates. Bill, do you want to take that one? I thought Bill Benjamin or had a real estate was on.
They are at about a one six to one seven times interest coverage ratio on a very conservative definition of interest coverage, meaning.
Pro forma for today's rate environment not trailing.
And I think we all would agree that whether we get one or two hikes here that we're towards the end and so I think we feel more confident and we have that we know we know that we're in a safe place in terms of the interest coverage ratio.
Obviously at at.
These levels if rates stay higher for longer.
Brennan Hawken: I'm happy to take it. If you look at the non-traded reads for Q3 this year, when you look at what's underpinning evaluation, we had cap rates roughly five and a half to 5.6% depending on the vehicle. If you go back a year, you know, we were probably 50 to 70 basis points, tight of that 4.8 and 5.2. So we have seen cap rate expansion, but as we mentioned, given that these funds are largely focused other exclusively on industrial logistics properties and multis, we are continuing to see pretty significant and healthy fundamental performance in terms of NOI growth and the development of the rent roles.
See any diminishment in fundamental performance youll be having more conversations with more owners of companies and assets and we are having now but again I just want to highlight that is not necessarily a bad thing for credit performance and.
Brennan Hawken: Excellent. Thanks for that.
The past is any indicator that probably has those books generating higher net rates of return given their ability to participate in equity value and to get incremental margin and fees and so again I think the books are in a really good spot right now.
Okay, great. Thank you, Mike and thank you Derrick.
And we have reached the end of the question and answer session.
Therefore, I will turn the call back over to Michael <unk> for closing remarks.
Michael Arougheti: And then I'm kind of curious about on the European waterfall and expectations for 2024. I believe you said 160 million, but you know, I thought that on the last call that was more like about 175 with the potential for upside. So am I remembering that correctly and could you maybe walk through what happened to that revision and how we should be thinking about upside and what could drive that from here? Sure, I'll take that one.
Operator, Craig Siegenthaler missed the answer to one question. So we are going to repeat that before mics closing remarks.
Craig asked what verticals in the alternative credit space is the most focused on or we're most focused on where we are avoiding and as areas need to move this business further horizontally to fill in additional white spaces, where you might now have investment staff today.
Sure. So I hope what I say now is consistent what I said.
For at least for what you guys.
Michael Arougheti: Ultimately, yeah, what we tried to lay out and we added the 2025 guidance with a little bit more clarity, kind of splitting out the periods between 24 and 25. Based on the current market environment, what we're seeing is a little bit of the extension of the duration of the underlying assets of these funds, which means that it pushes out the overall maturity of the fund a little bit. It actually ends up being a net positive for us in terms of these are assets, these are credit assets that are yielding well above the hurdle.
Look.
The answer is I do not think that we need to add capability one of the reasons why our business is growing the way that it is that we are.
One of the larger teams and one of the better capitalized platforms in the market.
We have a fully developed capability around most of the important relevant large segments of alternative credit.
And that is a big advantage. This is a market that like other parts of the private credit landscape is moving to scale.
We're obviously growing alongside of it and as we grow we continue to invest in.
Michael Arougheti: But because of the current market environment, they actually aren't refinancing quite as early as they used to. That's what's pushing out that duration. So ultimately what we're seeing is a build over a longer period of time with now we're expecting it more to land in that 2025 period as opposed to towards the end of 2024. And that's a little bit of what we've seen happen here in Q4 as well as we're expecting kind of a push of some of that in terms of what we've given as guidance in the past into 2024 and then some of that 2024 really extending into 2025.
And capability, both in different geographies and around different asset classes, but not a big build in order to capture the full <unk>.
Full market opportunity. So again, it's going to be about just continuing to form capital draw.
Dry partnerships with other market participants and the banks.
Places that we're spending a lot of time on right now as we've talked about our bank asset portfolios.
And lender finance, including NAV lending <unk> lending is 100 billion dollar market opportunity in my estimation and we're uniquely positioned to.
Michael Arougheti: So I wouldn't really call it a loss of it. It's actually a build in a larger build, but it's pushing it out just a little bit due to the current market environment. Got it. And is it possible for that duration to continue to get extended if we see, you know, conditions remain challenging for REFI, or is that a realistic worst case scenario? Not too much, because we're really approaching the natural maturity of a lot of those assets.
To execute we are working on a number of what I would call rescue loans and structured equity type of investments into the financial services market.
For good platforms with bad balance sheets, and so I would expect that youll see more of that.
Eventually I think the consumer part of the business will turn on as I said earlier, there's about two trillion dollars of consumer loans sitting on bank balance sheets that we think are going to need some form of resolution, which are pretty big addressable market for us.
Michael Arougheti: So it's really just in terms of what the REFI activity looks like. And if the market picks up, well, that could all cause REFI finances and turn over in those earlier portfolios, which would then accelerate the recognition of that. So it's really just a matter of what is the exact timing. We know what the total amount could be, the total amount continues to grow. It's when that will perfectly occur. And there's kind of arbitrary dates along the way.
And Craig had asked if there are things that we avoid I think generally the team has done a good job, saying that there are certain things that we categorically avoid like patent litigation for example, or biotic holes, but at the end of the day. The whole reason for this platform to exist is to be able to move around with a really good realm.
Michael Arougheti: Got it. Thanks for walking me through that.
At a value lens between the different parts of the alternative credit landscape in the different geographies. So we're pretty excited about what lies ahead for that team.
Okay. So thanks, Crawford pulling us back online and sorry, Craig that we didn't get to you. The first time around I didnt have anything to say other than again to thank everybody for their time today and continued support and we look forward to seeing everybody next quarter and happy Halloween.
Ken Worthington: Our next question comes from the line of Ken Worthington with JP Morgan. Please proceed with your question. Hi, good morning and thanks for taking the question. Maybe first on the fundraising guide. I think the your comments that you're on track for 65 billion this year suggest a reasonably reasonable slowdown in fourth quarter commitments. Is that just, you know, you being conservative or did some funds that you expect in 4Q maybe get pushed to 1Q?
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 28, 2023 by dialing eight 770 6606853 and for international callers by dialing 201612.
Ken Worthington: Can you give us a little more flavor there? Yeah, I think we said in excess of 65 Ken just because, you know, you get into the end of the year, you have certain things that will either be pulled forward or role. So, you know, I think we're just trying to be cautious given that some things may slip. But the funds that we've articulated are all, you know, in the process of having their closes here, you know, in the fourth quarter, 1 or 2 may slip, 1 or 2 may not. And that's really going to drive the ultimate, you know, the ultimate change, but there's nothing other than timing affecting affecting what the ultimate outcomes can be.
7415.
Replays. Please reference conference number 13740 segment one seven.
An archived replay will also be available on a webcast link located on the homepage of the Investor resources section of our website.
Yes.
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Okay.
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Okay.
Yes.
Okay.
Michael Arougheti: Okay, great. I sort of figured that. But in all credit, I think there's been a talk of a rush of deals to come before your end. Is that what you're expecting and what's driving this push into your end? I think that the pipeline there is building significantly is probably one of the busiest parts of the firm right now. You know, a lot of this is fossil end game driven and, you know, I think just folks trying to get focused on balance sheet composition and construction going into the end of the year. I don't think there's anything more than that, but we are absolutely experiencing that the pipeline is building transaction activity there is probably turned on more so than other parts of the firm right now.
Okay.
Ken Worthington: Okay, great.
Yes.
Yes.
Yes.
Okay.
Yes.
Michael Arougheti: Thank you very much.
Okay.
[music].
Yes.
Michael Brown: Our next question comes from the line of Michael backwards with Morgan Stanley. Please we'll see you with your question. Great.
Michael Arougheti: Good morning. Thanks for taking the question. Maybe just on commercial real estate. I believe in the past you mentioned that you'd expect the bulk of the primary market opportunity out of the regional banks to come from Siri lending. So I guess how much activity have you seen so far on the Siri lending front? What steps might you need to take to enhance the platform if at all in terms of hiring or build out in order to best capture the market opportunity set that you guys see.
Okay.
[music].
Thank you.
No.
Mhm.
Michael Arougheti: Thanks Mike, yeah, I don't think that we need to do a lot more than we're currently doing. We have a very well-developed team both in the US and in Europe. We've been building capability in Asia Pacific as well. As we highlighted on our prepared remarks, we have been forming capital and will continue to do so. I think, you know, when you think about what's going on in the world of commercial real estate and the change in basis, most of the exciting stuff is going to be happening, you know, in the top-to-middle part of the balance sheet of these entities.
Thank you.
Michael Arougheti: And that's going to be a combination of real estate lending solutions, real estate secondaries, structured equity through our opportunistic real estate business. And obviously, we have large teams against all three of those. So I think the bigger issue is really going to be, you know, investor behavior because as much as everybody appreciates how big of an opportunity that is, you have a lot of investors that are also, you know, playing defense within their existing exposures.
Michael Arougheti: And until they kind of get their heads around what it is that they currently own, I think it's going to be a little hard for them to get on offense. So I think for me, it's really going to be all on the capital side, not the capability, son. Okay, thanks.
Michael Arougheti: And just a follow-up question. Wanted to circle back to your comments on deployment. I think you mentioned that you were encouraged by the activity so far here in the fourth quarter and the pipeline. I think you mentioned alternative credit, busiest part of the firm. Just wanted to double click on that if you could maybe just elaborate a little bit more, you know, picked up in the third quarter here. But what's the opportunity set for the deployment activity to broaden out beyond alternative credit beyond credit into some of the other areas.
Michael Arougheti: So the firm and how do you see deployment activity evolving as you look out over the next 12 to 24 months. And maybe you could just remind us around some of the seasonality. Does that probably pick up and fork you and then slow down in the first quarter? Sure. I'll try to hit this from a couple different places. Number one, I think given the diversity of strategies that we have similar to my comments on fundraising.
Michael Arougheti: I'll make a similar commentary on deployment, which is, you know, when you look at the deployment experience, you'll see, you know, obviously a slowdown, but on a relative basis, still healthy deployment. So if you look a year ago, Q3 2022, we deployed about 18.3 billion. Obviously led by credit. And in Q3 23, we deployed 16.7 billion. That was up from 15.2 last quarter. So you kind of begin to see these ranges emerge.
Michael Arougheti: If you look at it on an LTM basis, LTM, this year about 66 billion LTM last year, about 90 billion. So obviously if we get into a market where we're seeing heightened transaction activity, that also gives you another way to think about the range of outcomes. And then just measure that against the 100 billion dollars of dry powder that we referenced earlier and will give you a general sense for where we are from a deployment opportunity standpoint as we deploy the dry powder.
Michael Arougheti: Most of what is happening now, and it goes back to what I just talked about with real estate is going to be in and around the opportunistic sides of the business, rescue lending, opportunistic refinancing, secondaries, you know, structured equity, et cetera, because the new issue volumes both in corporate, private equity and institution real estate are slow. We continue to have a competitive advantage just given our encompassing and the size of our portfolios.
Michael Arougheti: So if you look at our US and European direct lending portfolios, you'll see, you know, continuing 40 to 50% of deal volume at areas is coming from the installed book of business. And so that's a nice, you know, ballast as you think about the ability to deploy into a, you know, a tougher new issue market. I am optimistic that that transaction volume will pick up. We're seeing it build in the pipelines.
Michael Arougheti: If you talk to the cell side, they'll tell you that there's a significant pent up demand for asset sales to be coming to market. We're seeing it across the platform, but the math of it, if you just look at, for example, private equity, and you say today, biode funds are sitting on about $2.8 trillion of un-exited assets relative to about $1.1 trillion of dry powder. And if you look at that installed base or the aging of it, 50% of the companies that are currently owned by biode funds have been owned in excess of four years.
Michael Arougheti: And so if you just think about the weight of that money needing to transact and return capital to LPs, while most of what we're doing is kind of on that opportunistic side, I still believe that you're going to see new transaction volumes pick up, particularly now that you're getting into a stabilized rate environment.
Patrick Davitt: Great, thank you.
Patrick Davitt: Our next question comes from the line, or Patrick Davitt with Autonomous Research. Please we'll see you with your question. Hey, thanks for the questions. A quick follow-up on that one. Is the cadence of the pipe wind building for about 2024 pop or should we expect to pick up more immediately in 4Q? I think Q4 is shaping up nicely. Again, there's always a seasonal pick up in Q4 as people rush to get deals done by year end, typically just around tax planning and closing out the year.
Patrick Davitt: So there's always a flurry of activity towards the end of the year. Sometimes that slips, sometimes it doesn't, but I would expect that it will be a nice, nice ramp through Q4 and then into Q1 based on everything I'm seeing. Great, thanks.
Michael Arougheti: And then our level question, there was a rating agency out last week with a report showing large direct winding deals increasingly coming with no maintenance covenants, trying to argue that there's more pressure to converge terms with the broadly syndicated market. I'm not sure how they even know that, given these are private deals, but is that a trend you're seeing in areas participating? And if so, what is the argument, I guess, for lowering your protections together now?
Michael Arougheti: Yeah, I don't really know to your point. I don't know where that's coming from. And you can't paint the entire private credit market with the same brush. I'll make a couple of comments. I do think that in some of these private executions that are syndicated loan proxies, one would expect that some syndicated loan documentation terms would find their way into the private market. That to me is not really newsworthy or noteworthy.
Michael Arougheti: In the core middle market, that is not the case. The structures continue to be strong. They're as good as we've ever seen. The pendulum has swung to be obviously more lender friendly than borrower friendly. And so it feels a little sensational, and I would expect that that will continue. The other thing I would just point out, if you actually go back and look at the history of covenant-light loans, there's no evidence to say that covenant-light loans actually perform worse than covenant-did loans.
Michael Arougheti: And I think the reason is twofold. One, the best quality credits are those that can actually command better structures. And number two, sad as it may be, oftentimes in syndicated structures, many of the participants in those syndicates of different structural constraints or agendas. And so when you get into a restructuring conversation, you may have a COO that can't put new money in or can't take a ratings downgrade. You may have a credit fund that is at the end of fun life and can't participate in a junior security.
Michael Arougheti: And so there's all sorts of friction that you see in those syndicated loans that frankly when you have no covenants, it's protective of value. And I think that's why you could argue pretty strongly that covenant-light loans for the best borrowers will actually outperform. That's actually what we saw happen through the GFC.
Michael Arougheti: I'd make one last comment, which is why I think everybody is so excited about private credit relative to traded credit. At least these are the defaults and lost given default. When you are in a private credit instrument, covenant-did or not covenant-did, it's a bilateral agreement between a borrower and a lender or a very small lender group. And there is no ability for anyone else in the market with a different agenda or different entry point to come into that security and destroy value.
Michael Arougheti: And oftentimes in the traded market, obviously you can see people coming into capital structure and being disruptive in a way that you just don't see in the private market. So even in the absence of covenants, they perform differently because you restructure them through a bilateral negotiation between borrower and lender. And the deals that are getting done are no different than what we've seen for the last 30 years.
Unknown Executive: Next one.
Mike Brown: Thank you.
Jarrod Phillips: And our next question comes from the line of Mike Brown with KVW, please we'll see you with two questions. Great, I just wanted to follow up on the European Waterfall Fund dynamic. So Jared, it sounds like the amount that you guys were guiding to for the cumulative 2024 and 2025 period would be about in line with the base estimate that you had talked about in the past. You did talk about the potential for a high estimate of 650 previously if I recall correctly.
Jarrod Phillips: So should we just assume that that perhaps has been pushed out based on some of the duration commentary that you talked about or did that high estimate still hold and it's just a matter of the range is still somewhat wide and timing is still relatively uncertain at this point. I think it's more a case of that. In terms of looking at the overall environment, again as I mentioned earlier in the call, if we start to see repayments happen faster, well, if you're going to come closer to that higher end of the range because you're pulling a lot of that up, we're trying to be as accurate as we can with that lower end of the range.
Jarrod Phillips: But yeah, I wouldn't say that there's really a change to the range. The good news is as I mentioned earlier, again, is that the crude balance continues to grow and this is actually an advantageous market for that to be occurring in terms of extending the duration.
Michael Arougheti: Okay, great, thanks for that clarification. And I guess, you know, the credit metrics that they just continue to hold up really well and seem to really be outperforming expectations. What is really kind of driving that that's ranked in your view here, particularly for areas? And then when does the pressure from higher rates on cash flows really start to have a greater impact? You know, what would kind of be your outlook here on the on the credit side is if you think out over the next 12 to 18 months?
Michael Arougheti: You know, it's funny because we have not been in the, you know, recession camp for quite some time. And I think everyone just continues to, you know, hope for it for some reason. It's just not coming. And the simple answer without being cheeky is, we just put up a four and a half percent plus GDP print in the quarter and the economy is really strong. And we're seeing that play out in our portfolios.
Michael Arougheti: And we've tried to articulate that, you know, one of the benefits that we have given the breadth of our platform is that we're seeing private market information roll through on a monthly basis. And, you know, for the most part, we're seeing, you know, broad strength. There are obviously pockets of the economy that are weakening. There are certain segments of the consumer economy that are weaker. But, you know, taken in the aggregate, it paints a picture of continued economic strength.
Michael Arougheti: I think Kip and the team have done a good job talking about, you know, the credit metrics at ARCC and I'd reiterate their consistent across the private credit book. But the biggest protection is coming from the loan to value positioning of those portfolios and the continued growth in EBITDA, which is obviously promoting dollar de-leveraging. If you look at where those books sit today, they're about a 1.6 to 1.7 times interest coverage ratio on a very conservative definition of interest coverage, meaning, you know, pro forma for today's rate environment, not trailing.
Michael Arougheti: And I think we all would agree that whether we get one or two hikes here that were towards the end. And so I think we feel more confident that we have that we know, you know, we know that we're in a safe place in terms of the interest coverage ratio. Obviously, at that- These levels, if rates stay higher for longer, any diminishment in, you know, fundamental performance, you'll be having more conversations with more owners of companies and assets than we're having now.
Michael Arougheti: But again, I just want to highlight that is not necessarily a bad thing for credit performance. And, you know, if the past is any indicator, that probably has those books generating higher net rates of return given their ability to participate in. Equity value and to get incremental margin and and fees.
Unknown Executive: And so again, I think the books are in a really good spot right now. Okay, great. Thank you, Mike. And thank you, Derek. And we have reached the end of question and answer.
Michael Arougheti: Therefore, we'll turn to call back over to Michael or get you for closing remarks.
Michael Arougheti: Operator Craig Seganthal missed the answer to one question. So we're going to repeat that before Mike's closing remarks. Craig asked, what verticals in the alternative credit space is he most focused on or where most focused on? What are we avoiding? And as areas need to move this business further horizontally to fill in additional white spaces, where you might now have investment staff today. Sure. So I hope what I say now is consistent with I said before, at least for what you guys heard.
Michael Arougheti: Look, the simple answer is I do not think that we need to add capability. One of the reasons why our business is growing the way that it is is that we are, you know, one of the larger teams and one of the better capitalized platforms in the market. We have a fully developed capability around, you know, most of the important relevant large segments of alternative credit. And that is a big advantage.
Michael Arougheti: This is a market that, like other parts of the private credit landscape is moving to scale. We're obviously growing alongside of it. And as we grow, we continue to invest in, you know, in capability both in different geographies and around different asset classes. But not a big build in order to capture the full, you know, the full market opportunity. So again, it's going to be about just continuing to form capital, dry partnerships with other market participants and the banks.
Michael Arougheti: Places that we're spending a lot of time on right now as we've talked about are bank asset portfolios and lender finance, including nav lending, you know, nav lending is a hundred billion dollar market opportunity in my estimation and we're uniquely positioned to execute. We are working on a number of what I would call rescue loans and structured equity type investments into the financial services market for good platforms with bad balance sheets.
Michael Arougheti: And so I'd expect that you'll see more of that. Eventually, I think the consumer part of the business will turn on. As I said earlier, there's about $2 trillion of consumer loans sitting on bank balance sheets that we think are going to need some form of resolution. Which is a pretty big addressable market for us. And Craig had asked if there are things that we avoid. I think generally the team has done a good job, you know, saying that there are certain things that we, you know, categorically avoid, like patent litigation, for example, or viaticals.
Michael Arougheti: But at the end of the day, the whole reason for this platform to exist is to be able to move around with a really good relative value lens between the different parts of the alternative credit landscape and the different geographies. So we're pretty excited about what lies ahead for that team. Okay, so thanks, Crawl, for pulling us back online, and sorry, Craig, that we didn't get you the first time around.
Michael Arougheti: I didn't have anything to say other than, again, to thank everybody for their time today, and continue to support, and we look forward to seeing everybody next quarter, and happy Halloween.
Unknown Executive: Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, and archives we play of this conference call will be available through November 28th, 2023, by dialing 877-660-6853, and for international callers by dialeting, 201612-7415. For all replays, please reference conference number 1374-0717. And archive the replay will also be available on a webcast link located on the homepage of the Investory Resources section of our website.
Thank you.