Q4 2024 Ares Management Corp Earnings Call
Please standby were about to begin.
Speaker Change: Good morning, everyone welcome to Ares management Corporation's fourth quarter and year end 2024 earnings conference call. At this time all participants are in a listen only mode. As a reminder, this conference call is being recorded on Wednesday February 5th 2025.
Speaker Change: Now I'll turn the call over to Mr. Greg Mason co head of public market Investor Relations for Ares management. Please go ahead Sir.
Speaker Change: Good morning, and thank you for joining us today for our fourth quarter and year end 2024 conference call I'm joined today by Michael ever Getty, Our Chief Executive Officer, and Gerry Phillips, our Chief Financial Officer.
Speaker Change: We also have a number of executives with us today, who will be available during Q&A.
Speaker Change: Before we begin I want to remind you that comments made during this call contain forward looking statements and are subject to risks and uncertainties, including those identified in our risk factors in our SEC filings, our actual results could differ materially and we undertake no obligation to update any such forward looking statements.
Speaker Change: We'd 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 ares or any aerie spot.
Speaker Change: 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.
Speaker Change: Please refer to our fourth quarter earnings presentation available on the Investor resources section of our website for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures.
Speaker Change: Note that we plan to file our Form 10-K later this month.
Speaker Change: This morning, we announced that we declared a higher level of quarterly dividends, starting with our first quarter common dividend of $1 12 per share on the company's class, a and nonvoting common stock representing an increase of 20% over our dividend for the same quarter a year ago.
Speaker Change: The dividend will be paid on March 31, 2025 to holders of record on March 17th.
Speaker Change: Jerry will provide additional color on the drivers of this increase later in the call.
Now I'll turn the call over to Mike, who will start with some fourth quarter and year end business highlights and our outlook for 2025.
Mike: Great. Thank you, Greg and good morning, everyone I hope, you're all doing well.
Mike: I'd like to start off with some really exciting news regarding enhancements to our executive management team.
Mike: This morning, we announced that chip Davir and Blair Jacobson will be taking on newly created positions as co presidents effective immediately.
Mike: And these new roles, Kevin Blair will be responsible for helping drive firm wide strategic and operational initiatives and support critical investor and counterparty relationships in.
Mike: In addition, a key responsibility in their new role is to help develop the next generation of leaders across the platform.
Mike: I've had the good fortune of being friends with Kip and Blair for over 30 years I've had the pleasure of working with them over the past 'twenty.
Mike: As they have helped build and lead a tremendous credit franchise here at Ares with chip lead into global credit group and Blair co heading the European credit business.
Mike: Their experience and capabilities will be incredibly valuable as they expand their impact even further across the firm.
Mike: This will also be a big benefit to me as though it takes significant operational responsibilities off my plate, which will enable me to spend more time on our most important and impactful strategic priorities.
Mike: To be clear. This move is about expanding our executive management team to more effectively lead our business, which has grown tremendously over the past several years I.
Mike: I want to congratulate Kevin Blair on their promotions and I look forward to working with them in their new roles for many years to come.
Mike: And now let me begin with some high level comments on the year.
Mike: 2024, it was a very good year for Ares, both financially and strategically.
Mike: We celebrated the 10 year anniversary of our IPO and the 20 year anniversary of the IPO of our publicly traded BDC Ares capital, which is the largest of its kind in the industry.
Mike: We held investor days for both companies, where we laid out our vision and strategy for continued success.
Mike: We also made substantial organic and inorganic investments to bolster our growth outlook for the years ahead.
Mike: Yeah.
Mike: Every set many new financial records last year, including a U N fee paying AUN annual fundraising and deployment management fees FRE and realized income.
Mike: On a full year basis management fees, and FRE increased 15% and 17% respectively, driven by S. P. A AUM growth and improved FRE margins.
Mike: We expect our strong growth to continue we operate in vast addressable markets and although we're one of the largest alternative managers. We believe that we're still in the early innings of our global expansion.
Mike: We believe that retail and institutional investors remain meaningfully under allocated to the private assets that we source and invest in.
Mike: And we also expect the trend of increasing alternative allocations going to fewer scaled managers will continue to drive further inflows to the largest industry players such as ourselves.
Mike: To sustain our long term growth potential it's imperative that we continue deepening our ability to source differentiated high quality assets with attractive return profiles that we believe will enable us to maintain our long term performance through cycles.
Mike: To that end, we continue to invest in our origination capabilities around the globe, adding more than 100 investment professionals last year.
Mike: We now have one of the largest teams in the industry with over 1100 areas investment professionals sourcing thousands of investments across the risk return spectrum, and our 35 plus global offices.
Mike: Adding new strategies in new markets as evidenced by the G. C. P International acquisition will only further expand and enhance our capabilities.
Mike: Despite a more subdued transaction environment in 2024, we were very active using our relationships incumbency advantages and breadth of strategies to invest a record $106 7 billion up more than 50% over 2023.
Mike: Throughout the year, we saw our investing activities increased each quarter, finishing with over $32 billion invested during the fourth quarter.
Mike: Our Q4 investment activity represented a 34% increase from the prior year period, driven by meaningful increases in U S private credit real estate debt and equity and secondary solutions.
Mike: With respect to the year ahead, the current market environment is dynamic and we're optimistic that a gradual improvement in the overall transaction environment will translate into growing net investment activity in 2025 subject to normal market seasonality.
Mike: We believe that there's a meaningful amount of pent up demand to transact driven by the need for P exits.
Mike: As an illustration there's over three trillion dollars of unrealized value across 28000, unsold companies and global buyout portfolios and more than 40% of these investments are four years or older.
Mike: There are also other market forces that we expect should help unlock transaction activity, including increased business confidence and the potential for less regulation more active financing markets improving asset values narrowing bid ask spreads the return of strategic buyers and hopefully a more constructive IP.
Mike: Market.
Mike: We believe that our business is well positioned with market leading platforms in several of the fastest growing private market segments.
Mike: As we demonstrated over the last two years, we can be a supportive provider of liquidity to our many clients, even if new transaction volumes don't accelerate.
Mike: In addition, once the G C. P International acquisition closes we will have enhanced our capabilities to invest in real assets for the new economy, particularly in vertically integrated industrial real estate and digital infrastructure.
Mike: The growth in the primary markets for these assets is also driving a need for greater secondary solutions.
Mike: We're entering 2025, and an even stronger position to take advantage of a more active market with a record $133 billion of dry powder and the strongest array of investment strategies in our firm's history.
Mike: The $81 billion of AUM raised but that is not yet paying fees provides us with approximately 30% embedded gross base management fee growth upon deployment.
Mike: And when you combine this with our visibility around our European style performance income, we believe that we have high visibility on our long term growth.
Mike: Our ability to generate differentiated performance across an expanding array of investment solutions through various distribution channels continues to drive our fundraising capability.
Mike: In the fourth quarter, we raised a quarterly record of $28 $3 billion in new capital commitments and we set our full year fundraising record of $92 7 billion in 2024.
Mike: This full year amount exceeded our previous annual fundraising record by more than $15 billion and showcases the depth and diversity of our fund raising platform.
Mike: This fundraising momentum helped our assets under management grow by 16% year over year to over $484 billion.
Mike: Importantly, this greater depth and diversification is raising our fundraising floor.
Mike: In 2020 for nearly 65% of our total fundraising was outside of our campaign funds and this comprised 20% from wealth, 16% from institutional SMA is 7% from our insurance affiliate of speed and the remaining 22% from the mix of institutional open end funds.
Mike: Public entities Clo's and other vehicles.
Mike: Now I'd like to provide a few highlights from our strong Q4 fundraising results.
Mike: During the fourth quarter, a six accepted L. P equity commitments of $2 8 billion euros, which brought total LP commitments for this fund to 17 billion euros.
Mike: We believe that <unk> is the largest institutional private credit fund ever raised globally based on L. P equity commitments.
Mike: This represents more than 50% increase from the predecessor fund and a six received broad support from over 250 global investors, including 85 that are new to the Ares platform.
Mike: Including related vehicles and anticipated leverage the total available investment capital for the areas European direct lending strategy is expected to be approximately 30 billion euros.
Mike: When combined with STL, three which had its final close last quarter of approximately $34 billion in total investment capital, including related vehicles and anticipated fund leverage we've generated approximately $65 billion of institutional draw down capital in our direct lending strategies over the past 24 months.
Mike: Yes.
Mike: We're also seeing very strong demand for our open ended European direct lending fund in the wealth channel.
Mike: After raising nearly 1 billion and a half dollars in equity commitments in 2024 and crossing its one year anniversary last month. The fund now has AUM exceeding $2 2 billion.
Mike: Continuing to credit we raised more than $15 7 billion of equity and debt across our non traded BDC and public BDC for the full year and we issued a record 12 CLO is totaling nearly $7 billion.
Mike: Our recently launched third opportunistic credit fund began taking in capital in the fourth quarter and we expect a significant amount of additional capital to be raised by the end of Q1.
Mike: We also held $1 billion first close for our second sports Media and Entertainment Fund and we expect to raise significant capital in this strategy across multiple vehicles. This year.
Mike: Within our real assets group, the improving real estate market sentiment has already begun to materialize in our fundraising.
Mike: During the fourth quarter, we continued to see strong investor demand for our real estate debt strategies, which raised $2 4 billion in the quarter and we are in the market with the latest vintages of both our European and U S value add real estate campaign funds.
Mike: With respect to Aries is sixth infrastructure debt fund in the market, we expect to reach nearly $1 5 billion in total capital shortly and we continue to see increasing demand from investors.
Mike: We also expect a final close on our second climate infrastructure fund in the first half of 2025.
Mike: For the year, we raised $11 $5 billion across our real assets business and we're optimistic about the continued recovery in these markets throughout the course of 2025.
Mike: In secondaries strong fund raising across private equity infrastructure and credit drove the group's AUM up nearly 18% year over year.
Mike: During the fourth quarter, our new private equity structured solutions fund raised over $500 million in its initial closing and we raised an additional $630 million in our third infrastructure secondaries fund including related vehicles.
Mike: A pms continues to see strong fundraising momentum and exceeded $2 billion in total AUM at the end of the year.
Mike: Institutional investor equity commitments and related capital totaled over $56 billion in 2024 with strong support across our platform.
Mike: While we saw another strong year for credit we were pleased to see year over year, increasing commitments in both real assets and secondaries.
Mike: We continue to deepen our relationships with our current investors, who accounted for 85% of our institutional channel fundraising.
Mike: And we also welcomed more than 300, new institutional investors to the platform in 2024.
Mike: Now turning to the wealth channel, we continue to see significant opportunities to expand our business.
Mike: Last year demand for our products exceeded our ambitious expectations for the year.
Mike: For the full year, we raised over $10 billion in equity and over $18 billion of total AUM, including fund leverage.
Mike: Each quarter brought increased momentum and this culminated in our highest quarterly inflows in Q4, raising $3 1 billion in equity and $6 9 billion in total AUM, including leverage.
Mike: Our inflows approximately tripled year over year, and we estimate our market share increased to nearly 10%, placing us as a top three manager among our listed peers. According to third party industry data.
Mike: Our momentum has continued in January with over $1 billion in equity inflows.
Mike: Industry wide alternative capital raised in the wealth channel doubled last year, yet we believe that we're still in the early stages of growth.
Mike: High net worth individuals investable assets experienced strong growth last year in large part due to overweight public market exposure.
Mike: However, their average allocation to alternatives remains at just 3% to 4%.
Mike: And we believe that this allocation will continue to increase through education product innovation and expanding distribution segments like model portfolios in 401K plants.
Mike: We also expect the mass affluent market and new geographies, such as Japan, Canada, and Latin America to play a key role in growing the addressable universe for wealth.
Mike: The competitive landscape is intensifying, but we're confident in our competitive moat, which is supported by our products platform performance track record distribution scale and key relationships.
Mike: Our near term priorities in the channels include expanding our existing funds across our current partnerships, establishing new strategic partnerships across the or a family office and IBD channels and further broadening our distribution footprint internationally.
Mike: In 2025, our objective is to add each of our wealth products to new key distribution platforms, including wire houses and global private banks.
Mike: Notably in the R. A a and single family office channel, we raised $1 $3 billion last year, representing two eight times growth from the year prior and we expect this momentum to continue throughout 2025.
Mike: Our international business remains a significant and sustainable driver of growth with 36% of last year's capital flows coming from Europe, and Asia as compared to just 7% in 2023.
Mike: In the first half of 2025, we anticipate taking in monthly subscriptions for our newest semi liquid solution, a core infrastructure vehicle and sports media and entertainment vehicle, which would be intended to broaden the investor access to the significant and growing market opportunity.
Mike: We plan to continue delivering a suite of purpose built solutions that showcase the best of areas as private market capabilities.
Mike: We now have over $39 billion in AUM across eight semi liquid products and we are well on our way to the $100 billion target that we outlined at our Investor day last year.
Mike: Including our publicly traded and other vehicles in the retail channel, we're already approaching $100 billion of AUM.
Mike: We also achieved a significant milestone for our affiliated insurance platform.
Mike: Speed of recently announced raising over $2 3 billion in equity commitments with more than 75% coming from third party investors.
Mike: Our speedo has over $20 billion in total assets and we believe that it has the capital required to reach $50 billion in assets by the end of 2028, which is the target that we outlined at our Investor day.
In 2020 for speed as primary fixed annuity volumes nearly doubled to more than $3 8 billion significantly outpacing the 7% growth in fixed annuity sales for the industry.
Mike: Including reinsurance flows a speeder originated over $6 billion in new premiums for the year.
Mike: With strong business momentum, our robust capital base and reinvested earnings speed is well positioned to meet the growing demand for retirement products and related reinsurance solutions.
Mike: Turning to our fundraising goals for the year ahead, we expect another good fund raising year in 2025.
Mike: While we will not have our two largest campaign funds in the market, we expect fundraising could be only modestly lower than our record in 2024.
Mike: We expect to have 19 institutional commingled funds plus another 18 continuously offered institutional and retail products actively raising capital throughout the year, excluding new funds from the G. C P International acquisition.
Mike: Regarding G C. P International we expect that the transaction will close in the current quarter and we remain on track with our previously communicated financial plans for the transaction.
Mike: Once we close we believe that we will be in a favorable fundraising position with several funds in Japan, the U S and Europe coming to market.
Mike: For example, this year, we expect to launch the fifth vintage of the logistics development fund in Japan, which raised approximately $2 $7 billion converted at current exchange rates and the previous vintage and the second U S self storage fund, which raised $1 $5 billion in the previous vintage.
Mike: In addition, <unk> data center business is seeing significant momentum and we expect the first closings for its first Japanese data center development vehicle and the first European data Center development vehicle to occur during the first half of this year as both are experiencing strong demand.
Mike: We anticipate the total final equity commitments across these two funds to be approximately $4 billion at current exchange rates.
Mike: I am excited about the great people, we're adding to our team and the combined power of our two platforms.
Mike: And lastly, before I turn the call over to Jared I just wanted to acknowledge the devastating wildfires that impacted the Los Angeles community, including the loss and disruption for many of our employees and families in our L. A office, we're providing significant support and resources to our <unk> team members, who have been most significantly.
Mike: Impacted we're supporting local relief efforts through an employee giving campaign with matching contributions and we're providing long term support for the region through the Aries charitable Foundation.
Mike: Our thoughts are with our colleagues in the people of L. A and we will continue to support those affected as the situation evolves.
Mike: And now I'm going to turn the call over to Jared for his comments on our financial results and outlook Jared over to you.
Jared: Thanks, Mike.
Mike: Everyone.
Speaker Change: As Mike stated 2024 was a very good year for Aries, we generated record levels of gross fundraising and deployment, which led to continued double digit growth in our key metrics of AUM dry powder fee related earnings realized income and many others.
Speaker Change: We also enhanced our future growth prospects by expanding our investment strategies and capabilities, both organically through targeted staffing additions to our origination teams and inorganically with the pending acquisition of G. C. P International and completed acquisition of Walton Street, Mexico.
Speaker Change: We enter 2025 with a great deal of optimism about the continued success of our business.
Speaker Change: Economic and market environment that we expect will be more active and one that we believe will be more conducive to deployment activity for more of our investment strategies.
Speaker Change: Turning to our quarterly results our management fees were a record $781 million.
Speaker Change: Quarter fee related performance revenues totaled $162 million in line with our quarterly targeted range.
Speaker Change: For the full year F. Our PR increased 28% versus the prior period as we saw increased contributions from alternative credit and secondary products.
Speaker Change: In 2025, we expect additional growth in AUM from our direct lending alternative credit and secondary funds to generate higher overall F. R. P. R.
Speaker Change: That growth could be modest as we factor in a full year run rate of lower base interest rates and our direct lending SMA.
Speaker Change: We are currently not estimating any F. Our PR from our real estate group in 2025, and 2026 could be in play assuming a continued recovery in the real estate market.
Speaker Change: Fee related earnings for the full year increased 17% over the prior period with record FRE in Q4 of $396 million.
Speaker Change: For the quarter, but compensation and G&A expenses came in slightly below our initial expectations, resulting in FRE margins of 49%, which was ahead of our 40% target from last quarter's call.
Speaker Change: Supplemental distribution expenses associated with our wealth management products totaled $13 $6 million.
Speaker Change: Although our full year FRE margin increased by 60 basis points to 41, 5% the increase in supplemental distribution fees from $60 7 million in 2023 to $51 $2 million in 2024 created a drag on our year over year margin growth.
Speaker Change: These fees are associated with our significant momentum raising long dated perpetual capital in the wealth channel that will Jennifer generate meaningful base management fees and part one fees in the years to come.
Speaker Change: With 39 billion in AUM across our wealth management products and increasing fund raising momentum into 2025, we expect total management fees from these funds to increase more than 65% year over year to a range of $500 million to $550 million.
Speaker Change: While we expect distribution expenses to increase this year given our momentum. These expenses are expected to become less impactful to our results against a growing level of management fees from wealth products in 2025 and beyond.
Speaker Change: Our realization activity increased in the fourth quarter with net realized performance income totaling $89 3 million.
Speaker Change: For the full year, we realized $148 9 million of net performance income of which $94 5 million or 63% came from our European style funds.
Speaker Change: Even with the realizations recognized during the year, our net accrued performance income.
Speaker Change: Unconsolidated basis.
Speaker Change: Rose by approximately $86 million or 10% to $1 billion at year end with approximately $856 million or 85% and European cellphone.
Speaker Change: We continue to be very excited about a meaningful ramp in our net realized performance income as our growing amount of European style funds reach their maturities and his initial vintages of certain U S credit campaign funds enter their waterfall payments.
Speaker Change: As we've outlined in the past we look at our European style net realized performance income across the two year window, where we have a higher degree of visibility of realized income these thoughts.
Speaker Change: The amount that we could receive over both the longer term. The next two years essentially unchanged from the Apple Goalmouth, we outlined at our Investor day presentation last year for.
Speaker Change: For 2025, we continue to expect our European style net realized performance income to more than double to a range of 225 million to $275 million and.
Speaker Change: And we expect to considerably grow these amounts again in 2026.
Speaker Change: We plan to keep you updated as we progress throughout the year.
Speaker Change: Realized income for the fourth quarter totaled a record $476 million and for the full year and exceeded $1 4 billion of.
Speaker Change: A 16% increase from 2023.
Speaker Change: For the full year 2024, our effective tax rate on a realized income of 11, 7%.
Speaker Change: <unk> rate was higher in the fourth quarter due to a greater amount of net realized performance income, which generally has fewer deductions associated with it than our FRE.
Speaker Change: For 2025, we anticipate an effective tax rate on a realized income to be in the range of 11% to 15%.
Speaker Change: As of yearend, our AUM totaled over $484 billion.
Speaker Change: Up over 15% compared to the previous year and was driven almost entirely by organic growth.
Speaker Change: Our fee paying AUM totaled nearly $293 billion, a year and an increase of nearly 12% from year end 2023.
Speaker Change: As you can see in the presentation that accompanies our earnings release, our portfolios continue to perform very well.
For the full year, we experienced double digit returns in our U S and Europe direct lending strategies as well as in our alternative credit opportunistic credit and APAC credit strategies.
Speaker Change: Credit quality underlying our U S and European direct lending portfolios remained strong and stable.
Speaker Change: And our U S direct lending portfolio, our company's generated year over year EBITDA growth of 10, 6% and interest coverage continues to improve.
Speaker Change: ARCC reported non accruals this morning of one 7%.
Speaker Change: Which remains well below our long term average of two 8% since the GSC.
Speaker Change: In real estate the recovery of many asset class values is clearly underway.
Speaker Change: Our North American real estate equity composite of the fourth consecutive quarter of positive performance and ended the year up nearly 8% on a gross basis our.
Speaker Change: Our European real estate equity composites posted the second quarter ROE of positive performance.
Speaker Change: Our infrastructure that composite returns also continued to perform very well up 11, 7% on a gross basis for the full year.
Speaker Change: Within private equity our most recent vintage fund <unk> six is a top quartile fund in its vintage and it generated a strong time weighted gross return of 18, 9% in 2024.
Speaker Change: Our composite portfolio companies experienced nearly 14% year over year organic growth in EBITDA in the fourth quarter.
Speaker Change: As I outlined at the beginning of my remarks, we are well positioned for strong growth in 2025. It is in line with the financial targets, we highlighted at our Investor day.
Speaker Change: This does not account for any impact from the <unk> International acquisition.
Speaker Change: Which we anticipate will be an exciting addition to the long term growth of our business.
Speaker Change: Finally at the beginning of each year, we aim to set a fixed quarterly dividend for the coming year.
Speaker Change: Based on the significant visibility we have towards our FRE growth, we've elected to increase our dividend to $1 12 up 20% from last year.
Speaker Change: Quality AUM across the business underpins, our stable and growing FRE base, which continues to support our dividend.
Speaker Change: Our confidence in our European style net realized performance income also enhances our ability to grow our annual dividend, 20% plus each year.
Mike: I'll now turn the call back over to Mike for his concluding remarks.
Mike: Great. Thanks Jared.
Speaker Change: We're excited about the opportunities ahead for 2025.
Speaker Change: We're entering the year with a record amount of dry powder and an enhanced set of capabilities and solutions to address the diverse needs of our global client base.
Speaker Change: We expect transaction activity to expand year over year, and the new administration could provide some tailwind for deployment, especially if an improved regulatory and antitrust environment enables more business growth and M&A activity in the market.
Speaker Change: Our growth is underpinned by generating differentiated fund performance for our investors, which is driven by our broad direct origination capability people institutional processes and our strong culture.
Speaker Change: And to that end I'm, just so proud and grateful for the hard work and dedication of our employees around the globe I'm also deeply appreciative of our investors continuing support for our company.
Speaker Change: And with that operator, I think we can now open up the line for questions.
Speaker Change: Certainly thank you Mr. Eric Yeti, ladies and gentlemen at this time, if you would like to ask a question. Please press star one on your Touchtone telephone if you would like to withdraw your question. Please press star two we ask that you. Please limit your questions to one initial question and then one follow up question.
Speaker Change: We'll go first this morning to Craig Siegenthaler of Bank of America.
Craig Siegenthaler: Good morning, Mike Jared and kept them Blair if you're on the call congrats on the promotions.
Speaker Change: They are here and thank you.
Speaker Change: So I have a long term expense question.
Speaker Change: G&A expenses rose by more than 20% in 2024, and I know, there's some noise in there like Crescent point in <unk> 'twenty three that actually helped the comp but also you had a new New York City lease coming in this year. So we wanted your high level thoughts on the go forward core growth rate of <unk>.
Speaker Change: G&A and also how our supplemental distribution fees in the wealth channel a factor and then you're also closing G. C. P. I think this quarter as you said, so what will be the near term left from that thank you.
Speaker Change: Sure. Thanks, Craig.
Speaker Change: I would say that.
Speaker Change: First off going through the story of G&A. This year supplemental distribution fees are really the major driver of the changes year over year as those increased pretty dramatically up to about $50 million for the full year about 50 basis points of what we raised.
Speaker Change: During the year of that $10 8 billion that we raised in that channel now we do expect to continue to raise more in that channel and for those amounts to increase so I would expect that those expenses would increase as well. However, the one thing I'd point out is as we open new channels of distribution, we're less reliant on those channels that.
Speaker Change: <unk> these upfront or Rev share fees. So if you look at that 50 basis points for the full year. It was actually only 43 basis points of the capital raised in the fourth quarter. So we will still see some growth in that and that's growth that's highly correlated to fundraising. We also have marketing events and other.
Speaker Change: Sales events from the institutional channel, which Youll also see correlated more to our fund raising then you will towards anything else.
Speaker Change: The remaining part of that is the occupancy expenses that you mentioned, which are probably the largest driver of our G&A expenses. As you noted we did just bring online a couple of new floors here in New York due to the expansion of our head count. We also have our new headquarters in Los Angeles, and we're still carrying some of our old headquarter.
Speaker Change: So that will eventually roll off towards either the end of next year early in 2027.
Speaker Change: Meaning that Youll see L. A expenses go down while New York will increase over the next that five year period.
Speaker Change: Those expenses, along with expenses like technology and.
Speaker Change: And items of that nature are much more correlated to our head count. So as you see our head count grow you will see that G&A expense grow now as we've been able to show scale, we would look to revenues growing at a higher percentage than our both head count and therefore, those G&A expenses and then maybe the last two.
Speaker Change: Point to bring in is the <unk> acquisition, which will bring in some new expenses and G&A. However, we talked about it in our call when we announced the acquisition that their margins were relatively similar to the margins that we see in our current real estate business, excluding the impact of data centers, which are.
Speaker Change: Right now as we mapped out at about $20 million FRE drag.
Speaker Change: As we wait for funds to launch out of that space, which we expect will be in the near term, but we will carry that essentially expense load until you start to see those data centers launched off the platform.
Speaker Change: Thank you Jared just as my follow up for Mike Mike given your change in responsibilities now with the elevation of Kent and blurry. It sounds like you can be more focused so curious what is it two or three biggest strategic initiatives that you plan to focus on now.
Speaker Change: Sure. Thanks, Craig.
Speaker Change: Let me maybe rephrase your question in two ways I'm not changing my responsibilities.
Speaker Change: Kipp has been my friend and partner for 35 years Blair same almost 30 years.
Speaker Change: <unk>.
Speaker Change: I view this as an expansion of the management capacity and strategic capacity of the enterprise.
Speaker Change: And I think we're really blessed and privilege that we have such a deep bench of people that we can do things like this while we're all still young and energized and focused.
Speaker Change: So really I best Kip and Blair to work with me on the highest impact growth opportunities, which right now are get the integration of <unk> right and position it for growth.
Speaker Change: As we've talked about there's a significant opportunity to bring together, our infrastructure and real assets platform to capitalize on the opportunity in digital infra and new economy real estate.
Speaker Change: We have the opportunity given our leadership position in corporate credit to continue to expand our market share in real estate and infrastructure lending.
Speaker Change: And obviously chip and Blair have a significant amount of experience and credibility in the private credit market to lend their expertise as we continue to scale into those market opportunities as you know Craig we have a differentiated approach to insurance, but our insurance capability continues to grow our insurance partnerships continue.
Speaker Change: To grow I think theres, a big opportunity to continue to look at ways to exploit our credit capabilities alongside a speed up.
Speaker Change: And as we said in the prepared remarks, we have about 255 partners here at Ares out of <unk>.
Speaker Change: <unk> 3200 employees. This is a very very deep bench and one of the things that we've always been focused on and I just think about my own journey here as we are constantly working on mentoring and developing the next generation of leaders.
Speaker Change: And I can't think of too better people to help me do that then learn kipp so.
Speaker Change: I have always been focused Craig and I are I'm not changing my priorities, but I think given the amount of opportunity that we have around the globe. It's now time to kind of fill those seats and just expand our capacity.
Speaker Change: Yeah.
Speaker Change: Thanks, Mike.
Speaker Change: Okay.
Speaker Change: Thank you well go next now to Kyle Voigt of K B W.
Speaker Change: Yeah.
Kyle Voigt: Hey, good morning, Thanks for taking the question.
Kyle Voigt: Maybe I can just get an update regarding M&A appetite with the DCP deal now set to close in the first quarter. Just wondering if we get an update on how you feel about the state of your pro forma business mix, where you sit strategically from an asset class and geographical perspective, and do you still feel like theres potential gaps to fill.
Kyle Voigt: And the product offering or internationally.
Kyle Voigt: Yes, thanks for the question.
Kyle Voigt: As we've said in the past with each successive acquisition that we've made I think the bar for making acquisitions gets higher and higher.
Kyle Voigt: And that's really just a function of a broadening out of our capability set and the organizational capacity that we have to launch and support organic growth initiatives. We.
Kyle Voigt: We have laid out as a strategic objective for the company to have full capital structure capabilities, meaning everything from control equity through traded debt.
Kyle Voigt: Debt securities in each of corporate real estate and infrastructure and in each of the U S. A.
Kyle Voigt: Europe and Asia. So if you were to kind of fill out that that gameboard. There are very few capabilities of consequence, and the global alternative space that we don't already have here. So I don't want to say that we're not going to do M&A, because it's been a really nice.
Kyle Voigt: Driver of growth here, it's represented probably 20% to 25% of our growth and as you've seen with things like Black Creek and the growth in wealth or the recent acceleration of growth in the secondaries platform. I think we have a really good playbook for accretive acquisitions and then the strategic acceleration of revenue synergies post acquisition. So we're caught.
Kyle Voigt: Looking and thinking and we're being both opportunistic and reactive to what the market shows us, but we have lots of organic growth ahead of us and I think the near term focus is going to be to exploit those opportunities versus M&A.
Kyle Voigt: Yeah.
Kyle Voigt: I appreciate that and just for my follow up just a question on the sequential growth in credit fee fee paying AUM I know you've noted on prior calls that that gross to net deployment ratio and expecting that to improve.
Kyle Voigt: I think you noted maybe an expected gradual improvement in the environment I guess anything that you can give.
Kyle Voigt: Give us in terms of helping us out with the pipeline that youre seeing.
Kyle Voigt: How that's going to progress in terms of that gross to net to plant ratio.
Kyle Voigt: The first half of the year and how you expect it to kind of hold through 2025 versus where you're at in <unk>.
Kyle Voigt: Yeah. It's still early obviously, we had a very strong deployment quarter in Q4.
Kyle Voigt:
Kyle Voigt: January is seasonally slow I think we've talked about this before we generally see lower deployment in Q1, and Q3 and stronger deployment in Q2 and Q4, just based on the rhythms of the business.
Kyle Voigt: But the private credit portfolios generally across the board I would say are increasing in activity.
Kyle Voigt: I think thats, just again a function of the market backdrop, particularly in the U S markets I think that there's a lot of pent up demand to transact and even though we believe that rates are going to be higher for longer I think we now have stability in rates, that's bringing capital off the sidelines and private credit and real estate in a way that we didn't see.
Kyle Voigt: Particularly in the first half of last year.
Kyle Voigt: I do want to reiterate what we said in the prepared remarks, which is that we are uniquely positioned when you look at our deployment relative to the transaction volumes in the market. If you look at our year over year deployment, we were up close to 60% or 107 billion compared to $68 billion global M&A volumes are only up 10% and so I think.
Kyle Voigt: It speaks volumes to a the diversity of the strategies that we have and the solutions that we can bring into the different markets, but it also speaks to the value of the incumbent relationships that exist within the portfolio and as we've talked about before depending on the period that we're looking at in our private credit book roughly two thirds of our deployment last year was coming from.
Kyle Voigt: Incumbent sponsor relationships and roughly half was coming from incumbent portfolio company relationships. So while we obviously are beneficiaries when the M&A activity picks up I do want to highlight that deployment to keep pace with our FRE growth is not dependent on M&A and in some circumstances slower trends.
Kyle Voigt: Action volumes actually increases the attractiveness of some of the liquidity solutions that we're able to provide.
Kyle Voigt: Yeah.
Kyle Voigt: Okay, great. Thank you.
Kyle Voigt: Okay.
Speaker Change: Thank you well go next now to Steven <unk> of Wolfe Research.
Kyle Voigt: Yeah.
Speaker Change: Hi, good morning, and thanks for taking my questions.
So maybe just to start off with a question on fund raising the momentum was still quite strong to close out the year.
Speaker Change: Given the tough fundraising comp in 'twenty four much lower expected contribution from flagships and twenty-five the modest year on year decline was it may will be better than we were anticipating that you alluded to Mike I was hoping you could drill down into the drivers of their non flagship fund raising in 'twenty five and what contribution you're contemplating from fact ships this year on that.
Speaker Change: Porting that more resilient fundraising outcome.
Speaker Change: Yes, again, it's early but as we said we have 18 or so co mingled funds that are in the market in 2025, and a similar number and open ended and perpetual continuous offer funds. So as we tried to articulate in the prepared remarks, but we would call the floor.
Speaker Change: For fund raising continues to elevate and while the campaign funds are still a meaningful contributor to our fund raising growth. We now have so.
So many other levers to pull that are more consistent in the way that capital flows into the platform.
Speaker Change: When you look at some of the meaningful quote unquote flagship campaign funds were in the market with our opportunistic credit fund, which has very significant momentum.
Speaker Change: We are in the market with our second sports media and entertainment vehicle, which we.
Speaker Change: About we are very active on a number of our core real estate equity and debt strategies and given the you know.
Speaker Change: Following out of that market, we're seeing good momentum there.
Speaker Change: We're in the market with our infrastructure debt strategies.
Speaker Change: And so on and so forth. So while we don't have the magnitude of of campaign funds like in our European direct lending your U S direct lending.
Speaker Change: We do have a significant number of funds that are represented across across the platform and then as you saw places like insurance and wealth are continuing to accelerate above that.
Speaker Change: The trend growth and so I would expect those to continue to be meaningful contributors as well. So I can't say in January exactly where it will be but as we said in the prepared remarks, I think that we we will likely be modestly lower than we were this year just because it was such a significant significant year, but I still think it's going to be an incredibly strong year for us.
Speaker Change: Okay.
Speaker Change: That's really helpful color and for my follow up I did want to ask on the speed T. Rowe partnership So T. Rowe on its recent earnings call discussed the partnership they cited opportunities for co developing investment offerings potentially in both insurance and private assets and just curious how you think this.
Speaker Change: Partnership could evolve over time, but this can also serve as a potential steppingstone to eventually break into the 401k space.
Speaker Change: Sure so.
Speaker Change: Reiterating what Rob said on the call we could not be more excited about the partnership I think theres a long relationship between our two firms.
Speaker Change: But I think Theres, a deep mutual respect T. Rowe is just one of the great financial services companies in the market and we're thrilled to be their partner.
Speaker Change: The team at Oak Hill, our long standing partners and Counterparties of ours, and close friends and so we're thrilled to be deepening that relationship as well.
Speaker Change: The way that I would describe it is still early days as we are obviously in a position to leverage that fixed income capabilities at T. Rowe to the benefit of its beta there are things that Oak Hill does within the private market space that complement some of the capabilities that we have here that will add value to speed up.
Speaker Change: As well as some of our third party insurance clients.
Speaker Change: Think the T Rowe gets to demonstrate its capability and capacity to create an insurance solutions, which I think is accretive to their business long term and then as you mentioned, it's still early days and figuring out exactly how and on what timeframe also will find their way in.
Speaker Change: The 401K market, but there are early discussions just around product development and a path forward to work together on various retirement product and obviously that would be super exciting if it came to fruition.
Speaker Change: Yeah.
Speaker Change: That's great and thanks, so much for taking my questions.
Speaker Change: Sure.
Speaker Change: We'll go next to Alex Blaustein of Goldman Sachs.
Speaker Change: Hey, good morning, Thank you for the question as well Mike.
Speaker Change: Mike I was hoping we could start with a question where the point you made earlier regarding institutional investors continued to expand their allocations to private credit obviously been an important theme for years, but as you think about the evolution into the investment grade private credit part of the market.
Speaker Change: Can you talk a little bit about the changes you're seeing in that L. P base are you seeing.
Speaker Change: Other types of insurance companies that are looking at this space historically has been largely life. So curious have you seen more movement on the P&C side other types of institutions as well, where those allocations could ultimately go I mean, right now they're still quite low and then ultimately air because origination capabilities to satisfy that need.
Speaker Change: Sure.
Speaker Change: <unk>.
So we do have the capability to manage high grade fixed income exposures for our clients.
Speaker Change: That largely takes place within our alternative credit group.
Speaker Change: We are now finding that as we continue to expand our vertical integration within our real estate and infrastructure businesses that we're able to create high grade exposures for our clients there as well.
Speaker Change: To this point given the risk return profile of those assets. It is predominantly insurance focused.
Speaker Change:
Speaker Change: We have had some success on bank partnerships.
Speaker Change: Within that space, we have seen some.
Speaker Change: Modest demand from some of the large global sovereigns for those exposures, but yes. Those are largely just swapping out of traded.
Speaker Change: High grade fixed income into non traded high grade fixed income to try to pick up some excess return.
Speaker Change: So while it's a huge Tam I view that slightly differently than some of the organic expansion that we're seeing across the sub investment grade portion of the private credit market.
Speaker Change: Got you great.
Speaker Change: Then another one related to GCE.
Speaker Change: With the deal getting closer to completion here I guess in the first quarter.
Speaker Change: Can you guys just level set and remind us what their 2020 for full year management fee base is how you guys expect that to grow over the next couple of years and once the deal closes.
Speaker Change: What kind of products, particularly in the retail side should we be thinking about you guys expanding into.
Speaker Change: Sure.
Speaker Change: He had gone over in the call. After we made the announcement was we expected that 2020 fives full year.
Speaker Change: The first 12 months after closing so not the full year of 2025, but the first 12 months after closing would be about $200 million of FRE.
Speaker Change: Not inclusive of of synergies and costs, so theres, probably about $10 million of synergies that may take longer than those 12 months to recognize and theres, probably about $10 million of costs as part of the integration that we may see as onetime costs going into there and then we modeled out.
Speaker Change: That we thought it would be about $245 million in 2026. The overall AUM was about 44 billion.
Speaker Change: Of AUM in the.
Speaker Change: The lion's share of that is coming out of Japan.
Speaker Change: Almost half of it is in Japan, with the remainder spread across the globe.
Speaker Change: The main retail product that they have there is in Japan with the J REIT product that they have that does do periodic capital raising depending on the <unk>.
Speaker Change: Current NAV and traded price and that did do quite a bit of capital raising from 2013 to 2023 2024 with the interest rate environment not being as conducive it didn't have as many raises but.
Speaker Change: But we would expect that in the future that will will continue to raise but that is a closed end product not open and like some of our non traded.
Speaker Change: Overall, we mapped out that we thought that their growth profile, including the data center opportunity would match the targets that we laid out at our Investor day, and overall, it's not really large enough to shift our targets one way or another that we laid out at Investor day in terms of our growth one thing I would just add on top of that as we've talked about in the prepared remarks.
Speaker Change: <unk> says, we will hit the ground running post closing with a number of capital raises that are already in flight.
Speaker Change: When you look at the data center pipeline.
Speaker Change: And the funds that we're raising in Japan, and the U K, that's been approached about $4 billion and then when you look at the self storage and.
Speaker Change: Japan real estate business, Thats, probably likely another $4 billion on top of that currency. Adjusted so I think there is a high confidence is based on the fund raising pipeline and deployment there that that trajectory from 'twenty five 'twenty six is intact.
Speaker Change: Great Alright, that's very helpful. Thank you for taking the question.
Speaker Change: Okay.
Speaker Change: Thank you the next now to Mike Brown with Wells Fargo.
Mike Brown: Great. Good morning, Thanks for taking my questions.
Mike Brown: So in light of the news with co President Kipp.
Mike Brown: Kipp and Blair I wanted to ask about Polaris side of the credit business and focus on the Europe direct lending side.
Mike Brown: I wanted to just hear about how is the health of the market there.
Mike Brown: The Trump administration impact some of the growth potential for the region and how does that impact perhaps that deployment opportunities there and just overall how is the competitive landscape in Europe currently.
Mike Brown: Yes sure. Thanks for the question a couple of things to unpack there.
Mike Brown: First on the macro side two.
Mike Brown: 2024 actually turned out better than we thought.
Mike Brown: Coming into the year there were concerns around.
Mike Brown: Inflation high rates potential recession, and as the year progressed, obviously high rates did their job inflation came down rates came down the economy's cap moving forward and with respect to the portfolio itself.
Mike Brown: Don't have many loans to very GDP sensitive.
Mike Brown: Sectors, we tend to favor sectors that are more resilient and have strong organic growth attached.
Mike Brown: So overall portfolio is doing well now your second question around.
Mike Brown: Politics, that's obviously quite topical.
Mike Brown: Well, it's early days with respect to.
Mike Brown: The Trump administration, but from our analysis.
Mike Brown: Again, we don't have a lot of exposure to sectors.
Mike Brown: That are exposed to significant trade flows therefore, it's hard to draw a straight line from potential tariffs to our portfolio companies, which again.
Tend to be of a size, where theyre more locally focused on individual European markets.
Mike Brown: In countries I think the other thing that's been talked about is potential impacts.
Mike Brown: Impacts on defense spend but again, that's not a significant end market that we're that we're focused on so overall I think from an economic perspective portfolio is doing well and we are also seeing and Mike alluded to this as well.
Mike Brown: Pickups and investment activity, given the European dry powder available given European private equity assets that need to be realized and certainly cost of capitals importance of slightly lower rates is helping.
Mike Brown: And that's again why deployment picked up throughout last year and Lux.
Mike Brown: Good coming into 'twenty five.
Speaker Change: Okay, great. Thank you and then maybe just wanted to ask on the banks.
Speaker Change: Become more formidable competitors again, how should we think about that interplay between the broadly syndicated loan market and the private credit market and any color on how we should think about.
Speaker Change: Some of the competitive landscape for <unk>.
Speaker Change: Indirect lending how that can impact spreads and leverage multiples deal structures et cetera. Thank you.
Speaker Change: Yes, sure and we've always said and I want to make sure that we say maybe ladder at this time the banks are more important partners of ours than they are competitors and I think that the narrative.
Speaker Change: Sure.
Speaker Change: Fierce competition between direct lending and banks is overblown.
Speaker Change: If you look at how we fund ourselves and how banks access these markets there is a great.
Speaker Change: Symbiotic.
Speaker Change: Relationship between their lending operations and their client franchises and our capital base in our origination and portfolio management capabilities.
Speaker Change: When the banks are risk on meeting, having a greater willingness to originate and distribute in the capital markets and the CLO machine is turned on you will see at the upper end of the private credit market large market predominantly sponsored unit tranches. There is competition between the banks and.
Speaker Change: And some of the larger direct lenders.
Speaker Change: In that instance, as you saw last year, our CLO machine turns on an earnings from one of our longest standing.
Speaker Change: I think best performing CLO managers in the market and so last year as the syndicated loan market was starting to thaw and.
Speaker Change: <unk> picked up you saw record CLO issuance for us so at least in that part of the market I feel like we're we're hedged where we are meaningfully differentiate in our private credit platform and I don't know that we talk about this enough is that we cover the entire spectrum of sizes sponsors non sponsor.
Speaker Change: <unk> direct to industry coverage corporate real assets asset backed etsy.
Speaker Change: Et cetera, and so there are platforms that we compete against that are significantly more exposed to competition at the upper end of the market.
Speaker Change: As it should be in that part of the market. If you are competing against the the liquid loan or high yield market, you will be more prone to <unk>.
Speaker Change: Pricing relative to those markets and it's one of the reasons why we have been so focused on building competitive edge.
Speaker Change: Competitive edge in the core middle market part of the business, where we can not only continue to grow and expand those relationships. We think that there is there is a more consistent excess return in pricing opportunity. The other thing that I think it's also important to think about is this idea that less bank.
Speaker Change: Regulated <unk> is forthcoming and that somehow the banks are going to wake up and become meaningful competitors.
Speaker Change: I think there is a misunderstanding as to why banks arent in these businesses.
If you look at the creation of the private credit markets has largely been a function of consolidation in the banks over the last 30 years.
Speaker Change: Very well entrenched regulatory capital frameworks within the banking and insurance markets.
Speaker Change: Move to scale just to name a few in the in the liquid markets, it's very very difficult for that to unwind and to see.
Speaker Change: Banks being meaningful competitors in the core parts of the market that we play in as an example last week, we announced that we purchased $1 $3 billion loan portfolio from ABN Amro.
Speaker Change: It was predominantly a.
Speaker Change: Digital assets digital infrastructure.
Speaker Change: Portfolio and that was.
Speaker Change: Just an example of how we're working together with them to bring capital to support their business and for them to optimize their balance sheet and grow their customer franchise.
Speaker Change: So interestingly post election, we probably some more.
Speaker Change: Srt's CRT and think portfolio activity in Q4 than we had seen in any quarter prior.
Speaker Change: So.
Speaker Change: I would expect that to continue so I don't want to.
Speaker Change: That's a long answer but the simple answer is as the banks get more active that's usually good for our CLO and liquid franchise. It means that M&A activity is picking up and our experience has been you know that's a net benefit to the platform given the way that we're structured.
Speaker Change: Okay, Great very comprehensive answer thank you Mike.
Thank you well go next now to Bill Katz with TD Cowen.
Bill Katz: Okay. Thank you very much congrats guys on the promotions.
Speaker Change: Back to OE chair I'd like to commit this at a slightly different angle does this give you an opportunity to rethink the mass affluent market place without compromising our fee rates I know when the KKR and our capital Group initiative came out there was a lot of skepticism about what the economics might look like and I know you firstly.
Speaker Change: Want to protect that that base management fee, but just give you an opportunity to potentially expand the the wealth management opportunity without that compromise.
Speaker Change:
Speaker Change: It's too early to tell.
Speaker Change: I'd say I think what I said last quarter, which is our view on any partnership whether it's between us and a traditional manager or us in a bank or us in <unk> and.
Speaker Change: In summary, well.
Speaker Change: It has to be customer led and client led we need to convince ourselves putting the fees. Aside. The first question Seb does this create an investment outcome or a product for the client that adds value to them. The idea of just taking.
Speaker Change: Alternative assets and traditional asset mushing them together and offering in the package people can do that today right Theres open architecture in the markets that if somebody wants to access Ares private product. They can do it through our traded products. They can do it through our non traded products. They can do it through.
Speaker Change: Investing in the management company and so on and so forth. So.
Speaker Change: Our view, if we are going to introduce a product through partnership it has to create something in the market that is truly differentiated first and foremost and then we'll worry about the economics of the product.
Speaker Change: And then two I also want to remind everybody when we talked about in prepared remarks that the binding constraint to growth and profitability in our businesses to be able to create differentiated assets to then deliver differentiated performance to our clients and there's not an infinite amount of differentiated product in the world and so I think.
Speaker Change: Good business builders will focus on making sure that they are satisfying client needs, but also making sure that their capital base is optimized for the investable opportunity and that's the way that we've we've built areas and will continue to focus on it.
Speaker Change: I do think that Theres, a lot of complementarity to their business and our business going back to T Rowe and Ohh.
They have distribution capability in parts of the market that we don't as and we have distribution in certain parts of the market that they don't so there's a real potential synergy there and I think that as the partnership grows and strengthens we'll obviously explore those things, but definitely start too early to tell.
Speaker Change: Okay. Thank you and then one quick one for Gerry just thinking through the ins and outs for the FRE margin outlook.
Bill Katz: How should we be thinking about compensation and the reason I'm asking is if you have the European waterfall sort of.
Bill Katz: Poised to sort of accelerate rather dramatically is there an opportunity to sort of a reroute some of the compensation against that I know you sort of provide a net number relative.
Bill Katz: Relative to the comp you are paying either on sort of the base business or even against F. Our PR looking ahead. Thanks.
Bill Katz: Yes.
Bill Katz: Sure.
Speaker Change: Thanks, Bill I do think it does give you more flexibility, but the key to it is much like how we've used our part one fees and are more recurring FRP or in the past you have to wait until it's established and kind of pain and part of what people expect from their compensation.
Speaker Change: It's not a right on day, one as you harvest that it's going to create this meaningful change it does again provide flexibility and especially as those amounts grow and theres unallocated amounts that youre able to then use to supplement it is helpful. But it's more something I'd say after year, one or two of a full kick in of the.
Speaker Change: Forward It starts to grant you more and more flexibility because of the high level of predictability of those European waterfalls in the growth of those.
Speaker Change: Year over year.
Speaker Change: Okay.
Speaker Change: Great. Thank you very much.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Thank you the next now to Ken Worthington of JP Morgan.
Ken Worthington: Hi, Good morning. Thanks for the question just one for me and credit So fund raising and deployment continues to be quite strong.
Ken Worthington: Our fee paying AUM growth less well less so can you talk about gross deployment versus net deployment and the trends there ultimately with the refinance market look like in four Q relative to earlier in the year and how competitive bid areas choose to be in the refinance market.
Ken Worthington: Versus what you saw in the BSL market.
Ken Worthington: Again this quarter.
Ken Worthington: Yeah. So obviously, it's been the last couple of years have been.
Difficult I would say from a gross to net standpoint, just because as I mentioned earlier, the M&A market has been incredibly slow and global volumes have been.
Ken Worthington: Have been down.
Ken Worthington: And I feel really good about our ability to defend positions within the existing portfolios and find ways to bring liquidity into the market in non control transactions to maintain some pretty high levels of quality deployment, but if you look at the the gross to net in <unk>.
Ken Worthington: <unk> 24 versus prior periods. It was one of our lower.
Ken Worthington: Lower deployment periods in the last four years I would expect that 2025 will be a meaningful improvement.
Ken Worthington: And thats going to be largely a function of the M&A volumes turning back on.
Ken Worthington: A more meaningful deployment opportunity within real estate, which was very slow for a number of years.
Ken Worthington: And then just what I would call the weight of money.
Ken Worthington: That is in the ground today in the private equity and institutional real assets market that needs to get resolved.
Ken Worthington: And so there's a lot of things happening kind of in the market backdrop that we expect will.
Ken Worthington: Crank up the transaction volumes this year and that should begin to see the gross to net returned to normal levels.
Ken Worthington: Okay.
Ken Worthington: <unk> all that different than <unk>.
Ken Worthington: So if you look at for Q gross to net across the platform. It was 42% and if you look at Q1. It was 22. So you did see you.
Ken Worthington: You did see a move but if you look at if you look at it across the entire year it was 37%.
Ken Worthington: Versus 46% in 2023, so there is still significant deployment opportunity, but it was definitely a four year low in terms of the gross to net.
Ken Worthington: Perfect. Thank you very much improvement sure.
Ken Worthington: Okay. Thank you.
Speaker Change: Thank you the next now to Brennan Hawken of UBS.
Brennan Hawken: Hey, good morning, Thanks for taking my question most of my questions have been asked and answered so I'll just keeps one.
Speaker Change: Last quarter, you spoke to an expectation for improving FRE margin in 2025.
Speaker Change: Is there a decent you spoke a little earlier on G&A, which is helpful. But how should we think about the potential magnitude for that and what are the primary factors driving it.
Speaker Change: Thanks.
Bryan: Hey, Bryan Thanks I'd.
Bryan: I would say that it's not too different than when we talked about at our Investor day, We expect that zero to 150 basis points expansion of course in the past we have gone above that when we go above that it generally as a result of a very active macro backdrop, which allows for deployment to go up higher than may.
Bryan: We would expect so the pace of deployment really dictate the speed at which margin expands in many cases, because just remind everybody is a.
Bryan: Credit predominated business, we're paid on deployment, meaning that we are paying people prior to us earning fees from some of the effort that will be put in so as dollars are put into the ground and put to work that enables us to expand our margin at a faster rate. So really a lot of it comes from how fast will we be able to have that net.
Bryan: Appointment number increase and that's what drives a lot of that expansion further as we start to see things like a read and AI REIT returned to positive fundraising on the common side, they've been net flat with the common and the 10 31 exchange for the year. So as we see that move back to positive and we've seen a lot.
Positive signs that will be something that continues to drive positive economics into the real estate business and allow us to expand margins there as well.
Bryan: Overall, we talked a lot this year about our distribution fees.
Bryan: Now that we raised the $10 8 billion in.
Bryan: AUM in that retail space that we had that $50 million distribution fees now, we'll get a full year.
Bryan: Of revenue off of those as opposed to just that partial year that you get throughout so really that was a flat to net negative to our margin for the year next year, we'll get the benefit of now having a full year of that in the ground of course there'll be more that we raise and there'll be more expense there, but it begins to create long term tailwind to that.
Bryan: Margin expansion. So there's a number of different areas and then like I highlighted earlier, we continue to seek scale and we continue to look to do more with what we have and as we build out more product more fundraising capability on more origination capability with what we have in the ground today that enables us to show scale and grow those expenses at a slower rate.
Bryan: We grow our revenues.
Speaker Change: Thanks for walking through that journey.
Bryan: Okay.
Okay.
Bryan: The next night to been bullish of Barclays.
Speaker Change: Hi, good morning, and thanks for taking my questions, maybe one last sort of follow up here. The last few questions just sort of been around the FRE outlook. Just curious anything you can share with us in terms of how we might think about management fee growth in 2025, you've talked about the sort of gross to net dynamics. I'm curious is there anything to do with this sort of deployment out of perpetual versus drawdown vehicles.
Speaker Change: Sort of thing we've obviously got your longer term FRE guide and clearly there is a kind of wide range, depending on the pace of deployment, but.
Speaker Change: It just seems like folks are sort of wondering like how do we sort of think about the topline growth, which will clearly be the driver of FRE margin expansion.
Speaker Change: Sure you have to think of it in a few different ways. The drawdown funds as you mentioned, that's really where the deployment is driving your expansion of management fees.
Speaker Change: That's where you look at that gross to net in terms of what happens in the retail product well that's fundraising driven because the minute that you raised that dollar. It begins to pay fees. However, you do have to model out. The fact that there is an expense with that or in the case of some of our European.
Speaker Change: There has been fee waivers in the past so out of our European platform as we move out of the fee waivers youll see benefit from that and then you'll see the benefit of fundraising dollars come to your top line or your management fees. Then when you look at our equity style funds. Those are also driven more on your fundraising however, a large number of those.
Speaker Change: Have a benefit where you get paid on committed but your management fee essentially doubles might go from 75 basis points to 150 basis points. Upon deployment. So you get some benefit of deploying what you had raised in prior years, plus you get the benefit of raising new dollars in the current year. So across the board you do.
Speaker Change: Have to factor in both that deployment like you mentioned, but also the fund raising on the equity side and the fund raising on the retail side.
Speaker Change: To make sure you're kind of matching it to that all of those we come up with what we believe will think will happen for the year and ultimately if we're able to beat that or exceed those amounts then that will drive further management fee growth above what we projected.
Speaker Change: I understood I appreciate all that maybe one last sort of nitty gritty modeling detail Jared you talked about the sort of range of tax rate outcomes for the year, depending on the pace of realizations I am just curious as the platform gets bigger as the European waterfall style realization start to come in like your after tax net income is getting bigger and bigger.
Speaker Change: Curious how should we think about the tax rate as youll start to be at the at some point you'll be at the corporate alternative minimum tax rate I believe.
Speaker Change: And should we start to expect the overall rate to sort of go up how do we think about that in the context of the sort of timing of realizations and I realize this is probably somewhat farther out because I think that applies after like several years of over $1 billion and after tax income, but just curious about how we might think about those pieces.
Speaker Change: And I think that that is why you saw our range go from 11% to 15% last year coming into the year. We mapped out 12 months to 15% we came in a little bit underneath that amount.
Speaker Change: Looking at this year <unk> is something that we're aware of it we would require certain things under GAAP to occur that would be relatively large changes mainly based on your unrealized portfolio. So to your point you are probably still a year or two away from reaching that 15% AMG tax and you are.
Speaker Change: Correct that as we see more realizations typically that drives our tax rate higher however, with the <unk> acquisition as we close that that will create a lot of taxable goodwill.
Speaker Change: That will amortize over 15 years and that will essentially drive your tax rate down. So that's why that range is 11% to $15 15 is really represents that A&P, but like I said, we thought it would be 12 to 15. This year came in slightly lower that should give you an idea of just what a regular year might look like.
Speaker Change: All right very helpful. Thanks, so much.
Michael Cyprus: Thank you well go next now to Michael Cyprus at Morgan Stanley.
Michael Cyprus: Oh, great. Thanks for taking my question just with the <unk> transaction.
Michael Cyprus: You guys are going to be in the market with a number of development vehicles for data centers. So just curious how youre thinking about the investment opportunity with data centers. There just given post the deep seek development that suggests that AI models, maybe a bit less capital energy intensive just curious how you're thinking about that and how your views are on our evolving around capex across the industry.
Michael Cyprus: Yeah look I think the markets are still trying to digest, what deep seek actually means in theirs.
Michael Cyprus: Maybe conflicting views as to what exactly the cost and investment to train those models actually was.
Michael Cyprus: From my perspective at a very high level.
Michael Cyprus: The move has always been to lower cost and increased efficiency.
Michael Cyprus: In the data center business and the cost of compute.
Michael Cyprus: And what we have seen with technological advancement and greater efficiency, we will typically see increased demand.
Michael Cyprus: And so.
My long term view is that the demand for compute will continue which will not change the the opportunity to build data centers with good counterparties in good locations.
Michael Cyprus: And maybe to that point, if you look at the market today. The significant preponderance of data centers are still going to just support cloud computing with the large cloud companies and obviously the AI transition is important most of the sites and plans for development that we have are catered towards data.
Michael Cyprus: Centres and cloud migration with what I would call upside for AI.
Michael Cyprus: Meaning that the client can elect to have that optionality in the way that we build the data center for them I think the good news is at least in terms of our business. The sites that we are developing with GCT are generally in major metropolitan areas, So London, Tokyo Osaka.
Michael Cyprus: Sao Paolo.
Michael Cyprus: Where there is real benefit from the proximity to the end user latency considerations are obviously also in part important. So we're not we're not speculatively building data centers and I think most people.
Michael Cyprus: Or similarly, situated will tell you that if you are building high quality data centers in the right places with the right customers.
Michael Cyprus: There is still a very significant opportunity to generate meaningful meaningful return.
Michael Cyprus: And the pipeline that we have and we talked about this when we announced the transaction.
Michael Cyprus: We have the land it's entitled It's powered and we are under LOI for the leasing and the financing. So the near term pipeline that we've underwritten and our view is not at risk and then lastly, I would just highlight the magnitude of the opportunity relative to the amount of capital is so.
Michael Cyprus: <unk> that even if you saw a pushing out of that pipeline, it's still under capitalized relative to the amount of money that is in the market on the debt and equity side to fund it estimates depending on the source would tell you that's a 4% to seven trillion dollars annual opportunity.
Michael Cyprus: And so needless to say that if we and other.
Michael Cyprus: Peers want to participate in that growth, we don't see four to seven trillion dollars of capital activity to to have it be a meaningful growth lever for us.
Michael Cyprus: So.
Michael Cyprus: There's a lot to unpack, obviously and all of that but I think at least our core investment thesis.
Michael Cyprus: <unk> remains intact, and we are still extremely enthusiastic about the opportunity.
Speaker Change: Great. Thank you and then just for a follow up question on private wealth I was hoping maybe you could just dig in a little bit around the traction youre seeing overseas. If you could maybe elaborate a bit on the success and maybe talk about some of the differences in their approach distribution that's needed to drive success overseas versus in the U S.
Michael Cyprus: Yeah.
Michael Cyprus: Yes look we were pleased over 35% of our capital raise was coming from our European and APAC.
Michael Cyprus: Positioning.
Michael Cyprus: The general difference is really just in terms of market structure. So if you think about the U S market. The wire houses play a pretty significant part in the growth opportunity there at least the scale opportunity and then the <unk> are rapidly catching up and probably growing faster right now than the <unk>.
Michael Cyprus: Your houses, albeit on a smaller number.
Michael Cyprus: When you start to move towards Europe, and Asia. The market structure is just fundamentally different there.
Michael Cyprus: More bank partnerships more wealth partnerships, just because the the wires are not as prevalent so you have to build.
Michael Cyprus: You have to build meaningful infrastructure to service the client base differently.
Michael Cyprus: I do think thats been a big differentiator for us when you look at the percentage of capital that we're raising and then also just to highlight when you look at our the success that we've had with our European direct lending product I think it was kind of the perfect marriage of capability on the investing side and capability on the fundraising side and we cracked a code that I think very few people.
Michael Cyprus: <unk> been able to crack.
Michael Cyprus: Great. Thanks, so much.
Michael Cyprus: Sure.
Speaker Change: Thank you and ladies and gentlemen that is all the time, we have for questions. Today, So that will bring us to the conclusion of today's call. If you missed any part of today's call an archived replay of this conference call will be available through March two.
Speaker Change: <unk> 2025 to domestic callers by calling one 883 nine to $4 75, and two international callers by dialing four zero to 2207220, an archived replay will also be available on a webcast link located on the homepage of the Investor resources, where sources weapon section of our web.
Speaker Change: Site again, ladies and gentlemen, thank you for joining us today, and we wish you all a great remainder of your day Goodbye.
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