Ares Management Corporation

Hello, everyone, and welcome to the Aries Management Corporation fourth quarter and year-ended December 31st, 2018 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Thursday, February 14th, 2019. And I would now like to turn the call over to Carl Drake, Head of Public Investor Relations for Aries Management.

Thank you, William. Good afternoon, and thank you for joining us today for our fourth quarter 2018 conference call. I'm joined today by Michael Arrighetti, our chief executive officer, and Michael McFerrin, our chief operating officer and chief financial officer. In addition, we'll have other executives available for the Q&A session, including David Kaplan, co-head of our private equity group, and Mitch Goldstein, co-head of our credit group. Before we begin, I want to remind you that comments made during the course of this conference call and webcast contain forward-looking statements and are subject to risks and uncertainties. Our actual results could differ materially from those expressed in such forward-looking statements for any reason. including those listed in our SEC filings. We assume no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. Moreover, please note that performance of an investment in our funds is discreet from performance of an investment in Aries Management Corporation. During this conference call, we will refer to certain non-GAAP financial measures, such as fee-related earnings and realized income. We use these as measures of operating performance, not as measures of liquidity. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like-total measures used by other companies. In addition, please note that our management fees include ARCC Part 1 fees. Please refer to our fourth quarter earnings presentation that we filed this morning for definitions and reconciliations of the measures to the most directly comparable GAAP measures. This presentation is also available under the investor resources section of our website at www.aresmgmt.com. and can be used as a reference for today's call. Please note that we plan to file our Form 10-K later this month. I'd like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any securities of Ares or any other person, including any interest in any fund. This morning, we announced that we declared our first quarter common dividend of $0.32 per share, representing an increase of 14% over our prior year's quarterly dividend. The dividend will be paid on March 29, 2019 to holders of record on March 15. This dividend level represents a 5.9% annualized yield based on yesterday's closing price. We also declared our quarterly preferred dividend of $43.75 per Series A preferred share, which is payable on March 31, 2019 to holders of record on March 15. Now I'll turn the call over to Michael Arrighetti, who will start with some quarterly and full-year financial and business highlights.

Great. Thank you, Carl. Good afternoon, everyone, and happy Valentine's Day. Our fourth quarter's results concluded a record year for ARIES. We grew our fee-related earnings and realized income in excess of 17 percent and increased our AUM over 20 percent, driven by a record year of fundraising. As Carl mentioned, we've increased our regular quarterly dividend by 14 percent to 32 cents per share, which annualized represents $1.28 per share. based on our positive outlook for continued growth in our core fee-related earnings. Mike McFerrin will provide more color on that when he walks through the financial results a little bit later. Before I get into the specifics and review the 2018 key highlights, I would like to start with just a few comments on the recent market volatility and the implications for our business. As you all know, the fourth quarter saw significant equity market volatility, which bled into parts of the credit markets. In our view, the technical selling pressure was disconnected from otherwise healthy corporate fundamentals. While we're seeing some modest deceleration of earnings growth, credit performance in general remains stable. Default rates remain low and below historical average levels. And I remind everybody that oftentimes a slow growth, choppy environment can be very good for our investing. It extends the duration of credit portfolios without compromising already strong debt service levels, and to provide more lender-friendly pricing and terms. On the PE side, it may reduce competition for assets. And if we were to see a more significant dislocation, this could also create separation between stronger and weaker credit managers and meaningful consolidation opportunities. Also on the PE side, it also enhances rescue financing and distress for control opportunities. So while the markets have recovered most of their December losses, The Q4 environment was a great reminder to everyone that markets can be fragile and that many geopolitical and global macro risks still remain. Our strong inflows and performance against the volatile Q4 backdrop is evidence of the stability and strength of our business model. We invest with a flexible relative value approach, and since we have locked up capital, we have a long timeframe for value creation and are never for sellers. Our clients trust us to invest aggressively during periods of dislocation and to exit investments as appropriate during more constructive times. So unlike many traditional asset managers that experience severe outflows in Q4, we saw near record inflows to our firm, illustrating this dynamic. And that leaves us well positioned for opportunities that future volatility may bring. In Q4, we had gross inflows of $10.4 billion in new capital and bringing the full year to a record of over $36 billion. All of this fundraising was organic and does not include assets acquired or any material amounts raised through partnerships or joint ventures. Our growing client base continues to reward our consistent performance, even in volatile markets, by giving us more capital. And over the past several years, we've been fortunate to experience strong fundraising in each of our business lines, from ever-larger subsequent vintages in well-established commingled fund families, like ACE and ACOF and our real estate private equity funds, through launching new commingled funds, as we demonstrated with PCS, SDL, energy ops, and real estate debt, by growing our managed account business across our credit strategies, by securing certain strategic partnerships, such as the insurance company, JV, we talked about on last quarter's call, and strategic mandates with large institutional investors, and importantly, the ongoing efforts outside of our institutional fundraising channel in places like ARCC and our growing CLO franchise. This fundraising momentum also demonstrates the valuable partnerships that we continue to build with our LPs, the expanding reach of our marketing infrastructure, and our ability to offer a growing array of innovative and attractive investment strategies across the platform. Over the past several years, we've added significant resources across our marketing, strategy, product development, and IR teams and extended our coverage across the globe. Today, we have approximately 95 professionals across these groups compared to 64 just three years ago. And we're really starting to see the benefits of these investments. Over the past 12 months, we added 139 new direct fund investors to the platform and 57% of all money raised came from investors outside of North America, illustrating our increasingly global footprint. We believe that we're just scratching the surface, growing in all major investor categories, particularly with global pension funds, insurance companies, sovereign wealth funds, and private banks. Our total number of direct investors has now increased to over 900, up more than 15% over the past year, and five-fold since 2011. and our existing investors continue to re-up with us in new funds or across the platform at an impressive rate. During 2018, the 131 existing LPs who invested directly with us invested 2.7 times more capital than our new investors. This reinforces the industry trend of LPs placing more of their capital with fewer managers, and we believe that it demonstrates their growing desire to invest more with Ares. So maybe now turning to more specifics on the fourth quarter and full year results, we had first closings in two first-time commingled funds, over $750 million in our energy opportunities private equity strategy and $600 million in our real estate debt core plus strategy. We also held multiple final fund closings, including our first-time senior direct lending fund, or SDL, at $3 billion of equity, which we expect will grow to over $5 billion of AUM with leverage. and in our ninth U.S. real estate value-add fund with over $1 billion of capital commitments. In our market-leading European direct lending business, we added over $2 billion in new capital across new and existing strategic accounts, and we added over $1.4 billion to ACE4's total capital, bringing total equity and debt in that strategy and fund to over $9 billion. As we've discussed on prior calls, another exciting growth area for us is in our asset-backed and structured credit strategies. We've renamed this strategy Alternative Credit to better reflect the breadth of the strategies that we offer across a wide spectrum of non-traditional corporate, consumer, and real estate credit assets. We believe that our Alternative Credit strategy has an addressable market of over $3 trillion in assets across the globe. As discussed over the past year, We've added and will continue to add significant talent to our team and have enhanced our capabilities across a wide range of assets. And during Q4 alone, we added $1.4 billion in new alternative credit funds, bringing full-year fundraising to $2.6 billion of gross commitments. These record levels of fundraising drove AUM growth of 23% for full-year 2018, positioning us to meaningfully grow fee-related earnings and realized income in the years ahead. And our fundraising momentum is continuing as we expect another above average year in 2019 with several larger flagship funds either launching this year and into 2020. I think most importantly, we continue to perform well for our fund investors. Our direct lending strategies generated exceptional relative returns in both the U.S. and Europe as evidenced by ARCC's strong earnings results and stable credit reported earlier this week. including a 12% net return for 2018. In Europe, our third European direct lending fund, ACE3, had gross returns in excess of 16% for 2018. Our real estate funds had yet another strong year, with our major U.S. and European private equity funds generating gross returns between 16% and 20% for 2018. And from a private equity standpoint, while still down for Q4, Our corporate private equity fund composite outperformed the public equity markets for the quarter, down 5.7 percent, versus the S&P 500, which was down 13.5 percent. I remind everybody that our three-year gross appreciation for our corporate PE composite remains in the high teens, and our longer-term aggregate gross IRRs since inception remain well over 20 percent. From an investing and deployment standpoint, we had an active year. as we scaled our teams and broadened our investing reach across various market segments and strategies. Total drawdown deployment was over $17 billion in 2018, up from nearly $13 billion in 2017, with growth across all three investment groups. Given the market environment, the key theme for us in 2018 was quality. We continued to focus on franchise businesses with top management teams where we could add value over time and protect our downside risk. In direct lending, we largely stayed senior secured in defensively positioned industries with a strong emphasis on backing incumbent borrowers and larger, more durable companies. About 90% of our 2018 transactions in direct lending included financial covenants, and more than half of those new commitments were to incumbent borrowers. In that business, we closed only 4% of the transactions we reviewed in with significant overweighting to non-cyclical and recession-resistant industries. In PE, given the challenging environment for regular-wave private equity, we invested our flexible capital selectively in high-quality platform companies with compelling growth dynamics and in attractive energy investments where we were seeing interesting relative value. And lastly, in real estate, we took advantage of favorable demand demographics and local supply demand trends to invest across multifamily and industrial and logistics properties in strong growth markets. And finally, before I turn it over to Mike, I think as everyone knows, in 2018, we made an important change to our corporate structure as we converted to a C-Corp for tax purposes in March and for legal governance purposes in November. These changes were designed to increase the liquidity in and broaden the universe of potential buyers of our stock. And while still early, we've already seen the benefits of these actions. Between March and year end, our public float increased from approximately 10% to about 30%. Our average daily trading volumes increased more than fourfold, and our institutional ownership has tripled. In addition, we were also included in several well-known stock indices for the first time, which facilitated nearly 6 million shares purchased by index funds late last year. We would also expect to be added to at least another large index later this year. And while our stock price was not immune to the year-end market pressures, we do believe that as a C-Corp, we're now better positioned to capture value for our stockholders over the long term. And with that, I'll turn the call over to Mike McFerrin, who will walk through the Q4 results in detail and describe our expected growth.