Ares Management Corporation

Welcome to the Aries Management Corporation first quarter 2019 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, May 2, 2019. I will now turn the call over to Carl Drake, head of public company investor relations for Aries Management. Please go ahead.

Thank you. Good morning. Thank you for joining us today for our first quarter 2019 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, David Kaplan, Co-Head of our Private Equity Group, and Kip DeVere, Head of our Credit Group, will be available for the Q&A session. 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-title measures used by other companies. In addition, please note that our management fees include ARCC Part 1 fees. Please refer to our first 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 also note we plan to file our form 10Q by early next week. I would 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 we declared our second quarter Class A common stock dividend of 32 cents per share, which is a 14% increase compared to our second quarter dividend a year ago. The dividend was paid on June 28, 2019 to holders of record on June 14. This dividend level represents a 5.2% annualized yield based on yesterday's closing price. We also declared our quarterly preferred dividend of 43.75 cents per Series A preferred share, which is payable on June 30th. 2019 to effective holders of record on June 14, 2019. Now we'll turn the call over to Michael Arrighetti, who will start with some quarterly financial and business highlights.

Thanks, Carl. Good morning, everyone. And as you can see from our earnings report this morning, our earnings and core financial metrics continue to steadily grow, and Q1 marked our eighth consecutive quarter of sequential FRE growth. We grew our fee-related earnings and realized income approximately 18%, and 45 percent respectively, and increased our AUM by over 20 percent year over year, driven in part by our continued strong fundraising momentum and our steady investing activities. Our first quarter fund performance was also strong, led by our corporate private equity funds, reflecting the strength of the public equity markets earlier this year. Before I go into more detail on the first quarter business highlights, I'd like to start just with a few comments about the credit and equity markets. Following the largely technical selling that we saw during the fourth quarter, the markets have rebounded meaningfully year to date. This is a reflection of the Fed's dovish stance, optimism surrounding the China trade talks, and a stable economic and employment backdrop. The recent GDP number was also encouraging. So while some corporations are experiencing slowing earnings growth, credit performance in general remains stable. Default rates remain very low by historical standards, and there's healthy liquidity in the system. While the level of transaction flows and competition varies by segment, we remain active, leveraging our inherent platform advantages to find value in transactions sourced by our 400-plus investment professionals. Interest rates remain low and are expected now to remain lower for longer. In this context, the demand for alternative assets remains robust as investors continue to seek opportunities for attractive returns with lower correlations to traded equity and fixed income investments. Our alternative assets often provide solutions for investors seeking higher current income or solving for funding gaps. For example, a recent study cited by the Center for Retirement Research at Boston College reported that, on average, a 28 percent funding gap exists between U.S. pension fund assets and liabilities, highlighting the increasing need for higher and more sustainable investment returns to fill this gap. With a high degree of current income, low correlations to traded assets, and meaningful downside protection, we believe that our broad-based investment products provide much-needed solutions for both our institutional and retail investors. In addition, the competitive market for quality assets places a premium on managers like Ares with extensive self-origination capabilities, large portfolios with significant repeat opportunities, flexible strategies, and broad relationship networks. Our expanding platform continues to resonate with our LP clients. Our current investors are adding greater amounts of capital to our funds. During the first quarter, we continued our fundraising momentum, adding $6.5 billion in new gross capital commitments. All of this fundraising was organic, and a growing portion, about $2.8 billion, came from add-ons to existing funds. Existing ARIES investors funded about 70 percent of the direct capital raised, which exemplifies a long-running market trend where investors are consolidating their assets with fewer managers that can offer broader capabilities. The new capital committed was diversified across our U.S. and European liquid and illiquid credit strategies as investors continue to demand less risky credit investments at the top of the capital structure given the extended business cycle. We also added more than $700 million in real estate capital during the first quarter, including add-ons to existing private debt and private equity funds and some managed co-investments. One noteworthy area of growth was within our alternative credit strategy, where we raised three new funds and added on to existing funds, all totaling $1.3 billion during the first quarter. We continue to see alternative credit as a meaningful growth area, and we continue to add resources to our growing team. We believe that alternative credit investments provide additional diversification and attractive returns ranging from 5% to 15% with strong downside protection through highly tailored and structured investments. We've now raised about $3.8 billion in alt credit funds over the last 12 months. Our forward fundraising outlook is strong with several new funds launched or to be launched this year and with several of our large successor funds likely coming up in all three of our investment groups in 2020. And given the good visibility that we have in our fundraising pipeline, we have high conviction for continued strong AUM growth in the years ahead. During the first quarter, we invested $6.4 billion out of our drawdown funds across the platform, and we're generally selecting the top 5% of investments we source as we concentrate on using a proprietary angle like a prior relationship or a particular familiarity with the company or management team. For example, our European direct lending team funded one of the first billion-pound sterling Unitranche financings in the European market to a repeat borrower that has performed well for us over a number of years. In our corporate PE business, we purchased a controlling interest in a leading national refrigeration and HVAC services company where we had a relationship with the CEO from a prior successful direct lending investment. We also provided rescue capital in a leading thrift retailer to unlock value for growth. And in this situation, similarly, we had a prior successful direct lending relationship with the company from 2006 to 2010. As you can see just from these three examples, we're using the breadth of our platform to source unique investments where we have a true edge. As I stated at the outset, we continue to perform well for our investors. Our direct lending strategies again generated strong relative performance with quarterly returns of 3% or better in both the U.S. and European representative strategies. From a corporate private equity standpoint, our ACOF composite rebounded sharply, up 8.7% for the first quarter, driven by the appreciation of our portfolio of public positions that was up north of 40%. Our real estate PE funds in the U.S. and Europe, which had annual returns in the high teens or better, for 2017 and 2018 had yet another solid quarter with our U.S. Fund 8 up more than 4%. Our fourth European Real Estate Fund, EF4, generated a 1.2% gross return for the first quarter and had gross appreciation of more than 15% over the last 12 months. And with that, I'll now turn the call back over to Mike McFerrin, who will walk through the Q1 results in more detail. Mike?

Thanks, Mike. As Mike stated earlier, ARIES is continuing to benefit from strong fundraising and investing activity. These factors are driving strong double-digit top-line growth with strong visibility on future earnings as we are in a position to convert new AUM raised but not yet earning fees into fee-related earnings and potential performance income. Our AUM growth continues to trend over 20% year-over-year, and our fee-paying AUM growth is catching up now in the high teens on a year-over-year basis. Our AUM reached approximately $137 billion at quarter end, driven by new fundraising, market appreciation, and limited runoff. Our 16 percent growth over the past year in fee-paying AUM to $87 billion is largely driven by deployment, as a meaningful amount of our AUM converts to fee-paying AUM once it is invested, and also benefits from inter-quarter fundraising and limited redemption activity. Management fees and fee-related earnings both increased 18% from the first quarter of 2018 and 14% and 15% respectively for the last 12 months compared to the prior 12-month period. Our corporate objective continues to be to grow our AUM and fee-related earnings annually in the mid to high teens, consistent with our historical growth rates. Let me now turn to our realized income. Our first quarter realized income of $105 million, up 45%, helped drive last 12 months realized income to $428 million, up 24% to the prior last 12-month period. In addition to the growth in our underlying fee-related earnings, the strength in Q1 realized income was primarily driven by monetizations from floor and decor in our private equity portfolio, along with some annual incentive fee paying managed accounts and direct lending. Our first quarter after-tax realized income per common share of 35 cents increased 30 percent year-over-year, and on a full 12-month basis was $1.50 per share, a 25 percent increase over prior last 12-month levels. Our steady growth in our fee-related earnings, which has accounted for about 66 percent of our realized income on average over the last eight quarters, provides a solid and growing foundation for realized income growth. We ended the first quarter with significant levels of dry powder and shadow AUM. Our available capital totaled $35 billion, up 32 percent from prior year, and our shadow AUM increased 56 percent from prior year to $27 billion. Of this $27 billion, approximately $23.8 billion is available for future deployment, with corresponding annual management fees totaling $224.1 million. Based on the underlying strategies, we continue to expect deployment horizons ranging from 18 to 36 months. Please note that the $224.1 million in incremental management fees does not include the impact of any potential ARCC Part 1 fees we expect to earn in the future, any additional management fees we would expect to earn from ARCC in excess of its current leverage, or the expiration of the $10 million per quarter ARCC Part 1 fee waiver at the end of the third quarter of 2019. Incentive eligible AUM also reached another record in the first quarter of $80 billion, up 23 percent year over year. Of that amount, about $27.3 billion is not yet invested and available for future deployment, which is approximately 93 percent of our first quarter incentive generating total. This should translate into material potential upside to our realized performance income in future years. Our incentive-generating AUM of $29.2 billion increased 25 percent year-over-year, and it's comprised 63 percent in credit strategies and 27 percent in private equity strategies. Of the amount of incentive-eligible AUM that is currently invested, excluding the capital gain Part 2 fees on the largely debt-oriented ARCC portfolio, over 75 percent is generating performance fees. Our management fees continue to represent more than 80 percent of our total fees and are derived from locked-up, long-dated capital, including permanent vehicles. Approximately 90 percent of our first quarter management fees were generated from permanent capital or funds with closed-end structures. Before handing the call back to Mike, I do want to spend a few minutes on our fee-related earnings margins and the composition of our business lines so you have a better appreciation of how we think about this. We expect and believe that our scaled businesses should operate between a 50 and 60 percent business line margin. As you can calculate from our first quarter segment results included in our earnings presentation, you will see that our credit group had a 56 percent margin, our private equity group had a 51 percent margin, and our real estate group had a 33 percent margin, all before our operations management group corporate overhead expenses. At any given point embedded within the margins for the respective groups are expenses we incur to develop future strategies, capabilities, and or businesses that will be drivers of continued and future growth. For example, over the past two years, we developed what we believe is one of the most talented special opportunities teams. We have added over 16 professionals who collectively identify, invest in, and manage unique special opportunities. including those in the world of stressed and distressed assets. This team, which is strategically situated within our private equity group, did not join us with incremental revenue, but rather enabled us to expand our capabilities that broaden our broader platform, and behind which we are raising dedicated capital to manage. This is just one example of our ongoing commitment to invest in the future growth of Ares. As you have witnessed throughout our history, we have demonstrated a strong track record, of leveraging our core capabilities to launch and eventually scale new products and strategies, which in turn has contributed to our ability to deliver consistent double-digit growth in asset center management, management fee revenue, and fee-related earnings. At just under $12 billion of AUM, our real estate group is not at the scale we believe it can achieve. As a result, it operates at a lower margin than our comparatively more scaled credit and private equity groups, We have great conviction about our real estate team, and our success in this asset class is evident through the continued strong performance across our real estate equity and debt strategies in the U.S. and Europe. If we were to exclude the initiatives where we are making ongoing investments along with our real estate group, we estimate our fee-related earnings margin would be in the mid-30s as compared to the 30 percent we had for the first quarter. I will note that eight quarters ago, we had a 26 percent margin, and we have line of sight to margin expansion as we continue to deploy our shadow AUM and scale our strategies for tomorrow. Before moving on, while margins are a data point we monitor as a key measure of profitability, the most important metrics to us, and hopefully to you, is our ability to grow assets, fee-related earnings, realized income, and dividends, all of which we have been doing consistently. Mike will now close with his thoughts on our positioning and future outlook.

Great. Thanks, Mike. So in summary, we believe that the business is incredibly well positioned for continued growth in the years ahead, and we're making investments to ensure that we capitalize on the strategic market opportunities where we believe that future growth is promising. We're making these investments in every investment group at Ares, and the outlook is exciting across the platform. As you can see from the results, the core business momentum is strong across fundraising, investing, realizations, and fund performance. And our clients appropriately continue to give us a greater share of their capital. And with our existing fund performance and expanding product suite, we continue to have great fundraising momentum. We also have a promising lineup of large successor funds in the queue over the next 12 months. And from a personnel and culture standpoint, I don't think that we've ever been stronger. And we continue to leverage the breadth of our platform and our collaborative culture to originate and structure unique deal flow and to generate attractive returns for our clients and, in turn, for our shareholders. As always, we appreciate your time and continued support for Ares. And, Operator, with that, we'd like to open up the line for questions.

Thank you. At this time, if you would like to ask a question, please press star then 1 on your touchtone phone. If you would like to withdraw that question, please press star then 2. Please pause for the first question. And our first question today comes from Michael Carrier with Bank of America, Merrill Lynch. Please go ahead with your question.

All right. Thanks. Good morning. Thanks for taking the question. Me, first one, just on the credit side of the business, returns were strong in the quarter. But I think the incentive AUM, it seems like it took a dip. I think it was driven by ARCC. So just anything that was more nuanced there, because from an environment, it seems a little counterintuitive.

Yeah. So if you recall, in Q4, we had a included incentive generating was, I'm guessing, about $13 billion of AUM relating to the ARCC Part 2 fees. And, Michael, if you recall, this is something we have highlighted in the past as what we consider non-recurring based on the debt nature of ARCC's portfolio. So while that was really beneficial for Q4, we wouldn't think of that as being something you should include on a regular basis. So I would kind of compare Q1 against Q4 without that number included.

I'd make one other additional comment, Michael, is if you look at the RI, while we had a large pickup from our – private equity realizations as we've continued to raise institutional managed accounts across the credit platform. You're starting to see incremental incentive fees come through the RI line as those grow and mature.

Okay, that's helpful. And then second one, just on the investor base, you guys have come a long way with the C-Corp conversion in shifting the investor base over the past year. You guys are a little bit more unique because from a float standpoint, you also have some challenges there. So just longer term, what's the strategy to maybe broaden that investor base and increase the float more in line with the peer group?

Yeah, why don't we start with the float? Because that one I will disagree with you on. I think a few years ago that was the case. If you look at us, our float over the last couple years has moved from 5%, 30% to the company, which means we have north of $1.7 billion traded. If you look at our daily volumes, the average is, I think, north of $600,000. So we actually have not heard feedback in recent quarters that the float was an obstacle to the investor base, whereas it once was. But I think institutions are now able to accumulate targeted positions in the stock. So I don't think there's any sort of, from our end, need to do anything to continue to unnaturally increase the float over time as, you know, the next extension of it will be as employees' awards vest. You know, that will have some modest growth to the float if employees were to sell shares over time or shares ever sold for taxes. But, again, I think we sit here today feeling pretty good about the float and the volume of the stock.

Okay. Thanks a lot.

And our next question comes from Chris Harris with Wells Fargo. Please go ahead with your question.

Thanks, guys. With the Federal Reserve on hold with respect to interest rates, presumably for some time, does that change anything from ARIES' perspective? And in particular, wondering if it changes how you're thinking about the business cycle or how you're investing new capital today?

Yeah, I can give a high-level perspective And David Kipp can chime in with a PE or credit specific. I think the good news is when you look across the portfolios at Aries, we have investments in over 1,500 middle market companies. And irrespective of Fed positioning, what we're seeing is generally very positive economic fundamentals in our corporate and real asset portfolios. As you would imagine, every underwriting we do across the platform, whether it's a private equity control buyout or a direct loan, part of our job is to pick the highest quality companies and then evaluate the durability of their cash flow. The way I would describe it is we're now in this really healthy balance where you've got good, solid economic fundamental growth. You're seeing GDP growth of 2% to 3%, and we'd expect that to continue. and with the new rate positioning, any concerns we had on deterioration in free cash flow coverage and debt service in our underwriting has been pushed back. So as I said in the prepared remarks, I think what this does is it's going to prolong the cycle, and at the same time, it's going to continue to drive the investor community to the type of alternative assets that that we invest in. But maybe David or Kip, if you want to talk specifically about any change perspectives in terms of how you're thinking about the investment environment.

Sure. This is David. You know, the list of known risk factors is, remains, you know, reasonably long on the, you know, sort of the macro level. The Fed's position today, I would say, moderates one of those risk factors. So, We think the benign environment that we find ourselves in today, whether that's 2% to 3% or 3% plus GDP growth, is going to continue.

Just a related follow-up, does that make potentially sub-debt a little bit more attractive in your view here or not necessarily? And I suppose the answer to that question would vary credit to credit.

Yeah, it's very credit to credit. And again, while the business is large, you're always underwriting company-specific Credit risks, I think as we talked about on the ARCC call, for larger companies where we've been able to take share from the high yield market, where we're doing structured private high yield or second lien investments, we've seen attractive relative value there. I would just say generally when we look across the alternative credit space, and I think the interest rate environment will continue to support this, we're just seeing incredible relative value up the capital structure, given where base rates and spreads are, even with the Fed on pause. And as I highlighted, I think what this is going to do is just keep flows coming to areas people are looking for opportunities to capture excess return away from the traditional fixed income markets and maybe move away from some of the volatility that they've experienced in global equities. So I wouldn't say this drives us to sub-debt, but we have been in a position where we've been able to leverage our scale in larger companies to provide capital in the middle and bottom part of the balance sheet where we see appropriate.

Thank you. And our next question comes from Jerry O'Hara with Jefferies. Please go ahead.

Great. Thanks for taking my question. Just maybe on the FRE margin expansion story, curious to sort of get your thoughts on how much of that kind of 30 percent target or outlook? Is it a function of future fundraising? You mentioned the main drawdown funds being in the market, perhaps 2020. Or is that sort of irrespective of those funds and just what's currently going on? Thank you.

Male Speaker So, just to clarify, the 30 percent is the margin we had this quarter and through all of 2018. So, that's our current FRE margin. you know, have expressed a view that if you think about how a lot of our management fee growth is going to be derived from capital we've already raised, so what we refer to as that shadow AUM, and which, just as a reminder, you know, we had $224 million of potential management fees tied to that growth. Again, capital that's raised today and being deployed. What's a little bit unique about the timeline on this is You know, the investments made to raise the capital, invest the capital, account for and report on the performance of that capital, those are made in advance of the management fees coming online as we get paid on most of that capital in shadow AUM or all of it on invested. So as we continue to deploy shadow AUM, we do expect our margins to expand. So I highlighted two years ago it was 26%. This quarter is 30%. Um, absent anything else, I think that's, you know, over the next couple of years, the trajectory into the low thirties from 30 is reasonable. Um, and we hope over time we'll continue to grow, but notwithstanding that we do really want to emphasize that, you know, you have, you know, I would look at us to thinking about our scale of businesses and our prepared remarks versus real estate, which we would say today is less scaled and operates at a lower margin. And we continue to, and I think always will. invest a portion of our earnings back into future growth of the business, which at any given point is going to be worth three to four points of margin, but the right thing to do for long-term friaries.

So, Jay, one other just concluding remark on that is if you look at the mature margins in the segment financials that Mike talked about, you'll see 56% and 51% with growth in PE. those are still scalable. And as you look at that forward fundraising pipeline, as you asked, going into 2020, we're now coming back around. We'd expect with a sixth buyout fund, likely to see the next vintage of our European direct lending funds come through, likely to see the next vintage of some of our novel U.S. direct lending funds. So those businesses are already at scale, and obviously we don't need to add the same overhead to manage larger pools as those mature vintages are coming through. So I do think that there is inherent scalability in the margin as we develop that fundraising queue going into 2020.

That's helpful. And perhaps just as a follow-up to your comments on some of the technical selling that was witnessed in late last year, I Are there any kind of insights that can be drawn there as to how we might be progressing through the current credit cycle or perhaps any opportunities that that sort of environment revealed going forward? Just some high-level comments or thoughts on that might be instructive. Thank you.

Yeah, I think what was interesting about the selling in the fourth quarter and when you just talk about the sub-investment grade credit markets in particular, we were seeing that weakening beginning in the October timeframe and accelerating through the end of the year. Reminding people that what's interesting about the traded credit markets is the structure of those markets has changed in two very important ways. Number one, the banks who were traditionally playing a very active role as market makers are post the financial crisis just based on regulatory capital framework regulation and risk positioning have been less active market makers in those markets. And so when you see selling in the market, price tends to gap out pretty quickly. The big opportunity for institutional managers like Aries is in the absence of the banks intermediating that flow, we have the opportunity to step in as a capital provider and at very attractive rates of return when there's that kind of volatility. And we don't think that that structural change is going to go back to the way that it was and represents a long-term opportunity for Aries. The second structural change is, if you look at the leveraged loan in the high-yield market, a significant... percentage of those markets is now in daily liquidity structures, either loan funds or ETFs. In order of magnitude, 15% to 16% of the loan market is held in funds with daily liquidity. About 30% to 40% of the high-yield market is in funds with daily liquidity. So when you take those two factors together and you have the opportunity for retail selling without as much orderly market making, you can see some pretty violent price action, that's a huge opportunity for us. So not surprisingly, when you look at our deployment activity in both our private and public credit businesses, there was very active deployment as we were pushing market into what was very obviously technical selling, and obviously that's now come back. So what it means for us is we have to structure funds going forward that provide us the flexibility to be in those markets when they develop. A lot of the things that we're focused on now, we're making sure that we have the flexibility to be in both the public and private markets so that we can capture that arbitrage when it develops. And obviously you see what those markets have done in the first quarter and year to date, and that's been a big, big source of outperformance for us.

Great. Thank you.

And our next question comes from Craig Segan-Faylor with Credit Suisse. Please go ahead.

Thanks. Good morning. The European direct lending business is really hitting on all four cylinders here, but it's also attracting more competition from other asset managers, which are also active on the fundraising front. So how do you defend your number one share in this business and what moats exist to help protect this business still?

I think the good news is we've seen this type of evolution in the U.S. market, and we've been able to defend our competitive position here as well. And I'll try to keep it high level. As we think about direct lending, you create competitive advantage in a couple of very straightforward ways. One is through origination. Originate more flow, see more flow, and be more selective. Two is through capital scale. both in terms of the size of your balance sheet, but the breadth of your product offering up and down a capital stack. And three is through the flexibility of the capital and how you position yourself to your investee clients and your LPs. So the way that we do it is, frankly, we have more people in more offices with more capital and better product. The hugest challenge that we've seen develop both in the U.S. and in Europe is the value of incumbency that gets created once we establish a market leadership position. And as we've talked about on these calls but also at ARCC, given the size and maturity of our businesses now, over 50% of the deal flow that we're doing in our direct lending franchise is to existing borrowers. So those are borrowers where we don't have to compete as aggressively to deploy capital. They're borrowers where the underwriting is easier because we've been living with these companies, seeing monthly financial statements, observing or sitting on the board, having a deep level of trust and relationship with the management team. That incumbency benefit is probably emerging as one of the largest moats around the business, where we're able to deploy capital into borrowers that we know with very little competition from the new entrants in the market. But if you look, lastly, at the number of new entrants and the size of the average fund in direct lending, particularly in Europe, it's very small. I believe that the average fund size for private credit funds in Europe is about $250 million. And so when you're investing a $250 million fund, you're either forced to focus on a larger, potentially non-institutional quality borrower, which we think comes with certain risks that we're not seeing in the upper end of the market, or two, it forces you to either buy intermediated product from someone else or club up transactions, which in and of itself is... puts you at a competitive disadvantage and potentially in a position where you're going to get adversely selected on credit. So obviously we're mindful of the liquidity. I think for whatever competitive tension it creates, it also promotes liquidity in the space and supports asset values and ultimate returns for folks like us who have real competitive advantage.

Thank you, Michael. Very comprehensive. Just as my follow-up here, I wanted to see if you could help us with the potential sizing of around the new Scott Gray's distress fund. And I'm just looking to see if you think he can replicate the success he was part of when he was over at Oaktree.

So we don't talk, as you guys know, about fund sizing. But this will be a multibillion-dollar-type fundraise for us and I think a continued growth engine. When you look at the returns that that team has generated over the last two years, they've been very attractive, leveraging this opportunity to move in and out of the public and private markets, and also leveraging the full strength of the platform across private equity, private credit, and tradable credit. So the answer is we're very optimistic about this fundraise, very optimistic about the long-term prospects for the business, and it's showing up in the returns, which is why we have such conviction right now.

Thank you.

And our next question comes from Alex Bloestein with Goldman Sachs. Please go ahead.

Good morning, guys. Just one question for me. As we think about the next flagship funds that you highlighted in the past, you've been able to really upsize every fund relative to the predecessor, and I'm just curious how you're thinking about the opportunity set in the market today. to size these new flagship funds? In other words, should we be thinking about a similarly kind of significant relative increase from the predecessor fund, or the opportunity set is not as robust as it was in a kind of prior vintage?

I think the simpler answer is yes. You know, historically, I believe on average, successor funds have been coming in at a minimum 20% in excess of of prior vintage, but if you look at the true flagships, we've been able to scale those closer to 40% in excess of the prior vintage. So when I think of where we are in the funds I articulated, I think that 20% to 40% historical experiences is what we would expect on a go-forward basis as well. When you think about some of these competitive advantages I just articulated in terms of origination breadth and capital scale, A lot of the growth is just continuing to harvest the relationship networks that we've already developed. And in the credit businesses in particular, we can sustain that growth just by increasing our average investment size and moving the business up market. So we don't really have to add a lot of people or do different things. That marginal growth comes with not a lot of marginal investment and really is just a scaling of our average ticket size.

Great. Thanks for that. And our next question comes from Kenneth Lee with RBC Capital. Please go ahead.

Hi. Thanks for taking my question. Just a follow-up on the FRE margins. Wondering if you can go into a little bit more detail as to what the key ongoing investments are. And it sounds as if they're going to be ongoing for quite some time, but just wondering if there's an expectation that they could taper off over the next year or so. Thanks.

Kenneth, I think ongoing investments are new strategies we're developing across different businesses. I use one example we had in our prepared remarks was clearly our special opportunities team. And that's the team of raising capital around. So as we do so, that's something that evolves from something where we're spending money into to to have developed that capability and those resources, and then we'll have revenue accompanying it in future periods. There's other examples, you know, real estate. We've talked about the growth of our private debt funds, which historically we did not have really any meaningful capital aside from the public we manage. So I think, you know, alternative credits. Mike touched on his prepared remarks. We've raised over a billion dollars over the quarter. That's an area we've added meaningful capabilities around across a broad swath of asset classes that we can participate in. The one thing I want to highlight, though, when you mentioned the taper off, that this is the history of ARIES and the future of ARIES is we will always be investing to expand what we do. And whether it's in types of investment products, leveraging our core capabilities into adjacent asset classes, geographies, what have you, But, you know, earlier on we had a question about Europe. Again, it wasn't terribly long ago that we opened a London office and built out a team in London and across the continent without assets to manage or revenue around it. And now we're the leading player there, and it's a meaningful contributor to our bottom line. So the things we're doing today, we expect them to evolve and grow and add to our growth. but they then will have the themes of tomorrow we're investing in. I think that's going to be a continuing story for us. Gotcha.

Very helpful. And just one follow-up, if I may. In the past, you've talked about potential expanding distribution to new channels, for example, private banks, and as well to new non-U.S. geographies. I wonder if you could talk about some of the progress that's being made on those fronts. Thanks.

Sure. So you highlighted a couple of the key areas for growth. We've put meaningful resources behind private bank distribution, order of magnitude that probably represented about 10% of the capital raised. Last year, we continued to make meaningful investments in other types of retail distribution. So Our fairly nascent credit interval fund, which is being distributed through the IBD, RIA, and high net worth channel is continuing to scale. We've made meaningful investments in our insurance company distribution by adding RMs, creating insurance dedicated funds and related product. Internationally, we've continued to scale our fundraising and IR teams in Asia, in the Middle East region, and in Europe. And we're seeing that begin to bear fruit in all of our existing fundraisers. So, again, back to the investments we've made, if you were to go back pre-IPO and look at the size of our IR and business development team versus where it is today. We've made a meaningful investment building at that global footprint, and obviously you're now starting to see that come through the complexion of the investors that are on the platform.

Great. Very helpful. Thanks.

And our next question comes from Michael Cypress with Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for the added color earlier on the fee-related earnings margin. Just wanted to follow up a little bit on that. I think you mentioned mid-30s margin. I think it's where you see yourselves operating today if you remove the real estate business and some of the investments you're making. I guess mid-30s still seems a little bit below the peers. So I'm just hoping you could talk a little bit about maybe what's structurally different with your business maybe versus some of the peer sets. And then you mentioned $224 million of management fees that that'll be coming through as capital is being deployed. Just curious what the incremental margin on that capital, on that, as it's actually put to work in terms of the FRE margin there. Is it close to 100%, just given the investments that you've already made?

Sure. So, why don't we start at the second part of that. $224 million is mostly driven by capital that we're getting paid uninvested. It mostly relates to private credit in the U.S. and Europe. So if you think about the incremental margin on that, I think I said in the prepared remarks, the credit group is operating at about 57% margin. So I think the mid-50s is probably a rational proxy for how the margin for that capital, those management fees coming online as we invest that capital. Going back to the Your question on how we compare to our peers, I think there's two points. Mid-30s, 35% to 37%. I don't think, when we look at it compared to our peers, we actually think when we adjust for some of these things, most notably the real estate business, and then if I look at our business lines, I think we're actually performing from a margin perspective very well in line with the rest of the industry. So I don't think our expense load is anything greater. and we do spend a lot of time looking at that from a reflective standpoint. So the last point is some of our peers, depending on which one you're looking at, clearly have some fee businesses we don't, which is fine. Our business model is what it is, and we're very happy with it. It was great for us. But overall, I think us aspiring for passing through 35% in time is, when you think about the margins of our businesses, is something very achievable for us.

I'd make one overlay comment to that, which is, as you've seen over the years, we have a very, very high conviction view that ultimately what differentiates us and people like us through the cycle is the ability to originate a unique deal flow. And I would say I think that Ares as a business has invested much more aggressively in our local sourcing network and our relationship network to sustain our growth than some of our peers have. You know, when you think about our direct lending franchise as one example, when you just look at the number of people in the number of offices that we've put in place to drive growth and sustainable competitive advantage, it's just something, it's a type of investment our peers just haven't made. So that does constrain margins a little bit as we continue to invest behind what we think is a meaningful differentiated value prop for us.

Not to pile on or beat this up, Jeff, but since this is the third question on margins, we want to be really clear. Margins are important. We pay attention to them. We discipline around expense growth, and the margins is important. However, the most important thing is the resulting fee-related earnings, realized income numbers, and our ability to grow those. So if we, you know, obviously I'm sure all of you would prefer, and as we would, that were able to grow fee-related earnings year over year 18% at a 30% margin, that not make the investments for growth and show a four-point higher margin, but have had high single digits or low teens growth in FRE. So I think that's ultimately what matters, because the growth in FRE is what's going to grow the dividend, which is the benefit to our investors on top of the stock appreciation. Margins are important, and I understand they're important for modeling, but growing the bottom line is ultimately what's going to count.

Great. Thanks so much. And maybe just a quick follow-up on, I guess, to the latter point around investing in the business, just hoping maybe you could flush out a little bit more, specifically on the credit side, how you're continuing to invest and creating that capacity there. You mentioned reference to the teams. Maybe you can help flush out in terms of where that headcount is today and where you see that going over the next couple of years.

Sure. So we can't be specific because obviously the markets grow and change, but I can give you a couple of specific examples. In our European direct lending business, we continue to add headcount in our core markets. But over the last 12 months, we've opened up an office in Amsterdam and we've opened up an office in Madrid as we continue to push our pan-European footprint there. In the alternative credit space, as we keep articulating, we are adding headcount and capability around the entire spectrum of asset-based and asset-backed financing opportunities in places like transportation assets and CMBS and RMBS and Finco lending. So, you know, Were you to go there, we're adding people and capability, obviously with the expectation that that's going to continue to be a big growth area for us. I think you saw us adding senior headcount in our real estate equity business over the last six months as we continue to push for growth. So, you know, it's hard to say that we're going to add 25 people in the next 18 months in strategy XYZ, but again, as we continue to scale the capital base, we're continuing to push the capabilities forward as well as the origination network.

Great. Thank you.

And our final question today comes from Robert Lee with KBW. Please go ahead.

Great. Thanks. Thanks for taking my question. I just wanted to maybe ask a little bit on the real estate business. I mean, clearly it's been a focal point for growth and place you're investing a lot. But, you know, I guess if you look at it, I mean, it seems like it's been a little bit more of a struggle there versus certainly the other businesses on getting that to grow. And, you know, how are you thinking, you know, about inorganic growth there? I know you've obviously done some acquisitions in that space before, but are you starting to feel like you really need to maybe be more aggressive inorganically to really kind of scale that up, so to speak, or are there enough things you feel like in the hopper that without that you can get there in a reasonable timeframe?

Yeah. So I'll give you a couple of ways to think about it. What we like about the real estate business is, Generally, it is probably the largest global addressable market for alternative managers like Ares. And depending on how you frame it up, it's probably a $10 trillion end market. What we also like about it is, at least as it exists today, it's still a fairly local business, which means that the competition and the competitive landscape is very fragmented. And what's so interesting about it is ARIES sitting with $12 billion of alternative real estate assets puts us somewhere between 10th and 15th in the globe in terms of institutional asset managers in the real estate space. And so when you think about it that way, what it says to us is there's a huge opportunity for market share consolidation given the size of the addressable market opportunity and the fact that there just really aren't that many scaled competitors. So we view that as much as an opportunity as we do having any internal disappointment about the size of the business. That said, as we've noticed in all of our businesses, scale is a huge driver about performance over time. The more our core businesses are scaling, the more we're seeing advantages develop in originations and growth and investment returns. So we're very focused on scaling up our real estate business. And so as a result of that desire to scale, we're obviously spending a lot of time looking at buy versus build. And I would say probably the growth in real estate will be a healthy combination of both. We have very good momentum in our existing core strategies. Performance across our debt and equity businesses has been best in class. So we'll continue to leverage that to grow the fund franchises. But I also think there is a meaningful opportunity for us through acquisition to grow that business.

And thanks. Maybe this is a quick follow-up on that topic. I'm sure you're constantly talking to potential inorganic opportunities. I'm just curious if with the C-Corp conversion, if that at all has an impact on those conversations, a change in the tone of people or anyone's willingness to engage in talks with you?

I think, yeah, I do think it's made it easier just because for all the reasons there was complexity for public conversations shareholders to own a publicly traded partnership. There is some complexity from an M&A standpoint for private business owners to own the same security. So I would say at the margin, that's helped some of the conversations. The other thing I would highlight, you didn't bring it up, but if you look at transactions in the market like the announced Brookfield Oak Tree transaction. I think it continues to demonstrate that this business is moving to scale and that the broader platforms ultimately are delivering a more compelling value proposition to the institutional and retail investor community. And I think the combination of the conversion, but also I think a recognition of the benefits of scale, we feel pretty confident that we're going to continue to see more inorganic growth opportunities.

Great. Thanks for taking my questions.

And this will conclude our question and answer session. I would like to turn the conference back over to Mike Arrighetti for any closing remarks.

Great. We don't have any. I just wanted to reiterate our gratitude for everybody's support and continued confidence in us, and we'll talk to you guys next quarter.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available through June 12, 2019 by dialing 877-344-7529 and to international callers by dialing 1-412-317-0088. For all replays, please reference the conference number 10129714. An archive replay will be available soon on a webcast link located at the homepage of the Investors Resource section of our website. Thank you. You may now disconnect.