Ares Management Corporation

Hello, and welcome to Aries Management Corporation's second 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 Wednesday, July 31st, 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 afternoon and thank you for joining us today for our second quarter 2019 conference call. I'm joined today by Michael Arrighetti, our CEO, and Michael McFerrin, our COO and CFO. In addition, David Kaplan, co-head of our private equity group, and Kip DeVere, head of our credit group, will be available for the question and answer 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. Please note that performance of an investment or 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. And these measures may not be comparable to like-total measures used by other companies. Also, please note that our management fees include ARCC Part 1 fees. Please refer to our second quarter earnings presentation we filed this morning for definitions and reconciliations of the measures to the most directly comparable GAAP measures. The 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. 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 we declared our third quarter common dividend 32 cents per share, a 14% year-over-year increase. The dividend will be paid on September 30th, 2019, to holders of record on September 16th. We also declared our quarterly preferred dividend of 43.75 cents per Series A preferred share, which is payable on September 30th, 2019, to effective holders of record on September 13th. Now I'll turn the call over to Michael Arrighetti, who will start with some quarterly financial and business highlights.

Great. Thanks, Carl. Good afternoon, everyone. I hope everyone's enjoying their summer. As you can see from our earnings report this morning, our core financial metrics continue to steadily grow as Q2 marked our ninth consecutive quarter of sequential AUM, management fee, and fee-related earnings growth. On a year-over-year basis for Q2, AUM was up over 17%, management fees increased 22%, and fee-related earnings accelerated 24%. as our FRE margin expanded to 31 percent. A great indicator of our embedded future growth, our AUM already raised but not yet earning fees increased nearly 22 percent year over year. Our strong momentum in these core metrics reflects our fundraising success, our steady deployment around the globe, quality fund performance, and our expansion into new products. Before I briefly walk through each one of those areas, let me update you on the macro environment and how it's impacting our business. The markets have continued to steadily rebound into the second quarter, reflecting the Fed's dovish stance on monetary policy amid solid employment, a strong consumer, and generally stable economic performance. While corporate earnings growth is decelerating, credit trends generally remain stable. Default rates remain low by historical standards, and there's healthy liquidity in the system. Real estate fundamentals also remain stable and are constructive for selective investing across our broad geographic footprint and diverse investment strategies. In general, we're seeing increased competition for quality assets, but we're remaining active. In this environment, it's particularly critical to have deep self-origination capabilities, extensive industry and asset expertise, and trusted management relationships in order to be well-positioned to invest. Interest rates remain low and, after today, may remain lower for much longer. This should only increase the need for investors to find durable yield and differentiated investment solutions. With a high degree of current income, lower correlations to traded assets, and meaningful downside protection, we believe that our broad-based suite of alternative investment products will continue to resonate with our clients. To that end, during the second quarter, we continued our strong fundraising momentum, adding $7.3 billion in new gross capital commitments, bringing last 12-month commitments to $31 billion. Existing fund investors again provided over 70% of the direct institutional capital we raised, which highlights the stickiness of our client model and the strength of our client relationships. All three of our investment groups contributed to the new capital raised. In credit, we raised new capital in all of our major strategies across U.S. and European direct lending, in alternative credit and global liquid credit. In private equity, we held our first close in our special opportunity strategy at over $1 billion, which is over half our target of $2 billion for this exciting first-time fund. And since quarter end, we also held an incremental close in our inaugural energy opportunities vehicle, bringing commitments to date to our target of $1 billion. In real estate, we experienced inflows in our European equity strategy as we now near a final close on our fifth opportunistic fund with total funds raised of more than $1.5 billion and additional inflows into our U.S. real estate debt strategy. Looking forward over the next 12 to 18 months, we expect this fundraising strength and momentum to continue. In addition to add-on investments and continued growth in managed accounts and strategic partnerships, We expect to raise meaningful successor flagship funds in all three of our investment groups, including opportunistic and value-add real estate private equity, corporate private equity, and junior capital debt strategies in our direct lending business. Given the good visibility we have in our fundraising pipeline, our conviction for continued strong double-digit percentage AUM growth in the years ahead remains very high. During the second quarter, we invested $4.1 billion out of our drawdown funds across the entire platform. We were most active in European and U.S. direct lending as we selectively funded primarily senior loan commitments with an emphasis on funding the growth needs of our incumbent existing borrowers. We also invested approximately $600 million in private equity, which was diversified across our corporate infrastructure and power and special ops strategies. As I stated at the outset, we continue to perform well for our fund investors with steady positive returns for the second quarter. Our reported quarterly credit, PE, and real estate returns all range between 2 and 4 percent for Q2, with our corporate and real estate PE strategies leading the way. As you can see, we continue to expand our products and further diversify our platform. Several recent examples of successful product line expansions include our strategies and special opportunities, energy opportunities, climate infrastructure, junior debt, private senior lending, secured and enhanced income, broadening our alternative credit strategy, and so on and so forth. The latest product expansion that I wanted to highlight is in our insurance solutions business. As many of you may have seen, earlier this month, we announced the launch of Espida Financial, the next step in the evolution of our insurance solutions platform. Aspita has agreed to acquire a life insurance and annuity platform based in Michigan that has assets over $1 billion. This platform was responsible for more than $1.7 billion in annuity sales in 2018 alone. We believe that Aspita will enable us to grow organically as well as inorganically and continue to allow us to partner with our insurance clients through reinsurance transactions. And with that, I'll now turn the call over to Mike McFerrin to walk through the Q2 results in more detail. Mike. Thanks, Mike.

As Mike stated, we continue to improve in almost all metrics with continued double-digit growth in AUM, fee-paying AUM, shadow AUM, management fees, and fee-related earnings. Our AUM reached approximately $142 billion at the end of the second quarter, up over 17% year-over-year, driven by capital raising in both new and existing strategies and market appreciations. Our 16% growth over the past year in fee-paying AUM to over $89 billion is largely driven by deployment of AUM previously not yet earning fees. Management fees grew 6% from last quarter and 22% from the second quarter of 2018. Similarly, fee-related earnings grew 8% from last quarter and 24% from the second quarter of 2018. Management fee growth benefited from solid deployment, new capital commitments, and an improving fee rate. Our fee-related earnings benefit from strong top-line growth and an expanding margin from operating leverage, with FRE margins reaching approximately 31 percent. Looking ahead, we believe a 15 percent-plus annual fee-related earnings growth rate is clearly in our line of sight as we continue to deploy AUM that is not yet earning fees. raise incremental capital, and benefit from expected future margin expansion. As we sit here today, we expect to achieve a 32 percent margin in the next few quarters and should be in the mid-30s in the next 18 to 24 months. Our second quarter realized income of $94 million was down slightly year-over-year, but year-to-date realized income of $199 million was up 10 percent compared to the same period last year. Our second quarter after-tax realized income per common share of 32 cents was down versus 40 cents per common share at this time last year. However, on a year-to-date basis, it was roughly flat at 66 cents versus 67 cents per common share last year. This flat year-to-date comparison largely reflects a higher and more normalized tax rate in 2019 versus 2018. While our second quarter realizations were slightly lighter than the prior year, we have visibility to one or more potentially significant realizations that could contribute to realized income for the second half of this year. As a reminder, realizations are lumpy in nature, which makes evaluating them on a quarterly basis difficult. To give you a sense of future realized performance fees, a good measure of embedded value lies within our net accrued performance fees. At the end of the second quarter, our net accrued performance fees had increased by 20% year-to-date and ended at a new record of $299 million, or $1.28 per common share if realized at such values. With respect to our financial results, we view fee-related earnings as our most important metric since it reflects our stable recurring earnings and is the most important metric in determining our dividends. Realized performance fees and realized investment income are inherently more volatile. As you may recall, we adopted a new capital management policy in 2018 that sought to address this volatility by pegging our dividend to expected annual fee-related earnings and retaining our realized performance income to support future growth and other corporate activities. While estimating realized income for any given quarter is challenging, it is more predictable over longer periods, and we have the benefit of growing fee-related earnings stream as a base. For the second quarter, fee-related earnings represented 82 percent of realized income. Over the last 10 quarters, it has represented 70 percent of realized income on average. I think these are useful data points for investors evaluating our realized income and its future growth. Let me shift to several other metrics that provide future visibility. Our available capital of $37 billion was up 11% over the prior year, and our AUM not yet earning fees, or shadow AUM, increased 22% from the prior year to finish the quarter over $29 billion. Of this $29 billion, approximately $27.3 billion is available for future deployment with corresponding potential annual management fees totaling $271.9 million. It's also important to note that the $271.9 million in incremental management fees does not include the impact of any potential ARCC Part 1 fees we expect to earn in the future on this increased leverage or the expiration of the $10 million per quarter ARCC Part 1 fee waiver at the end of the third quarter of 2019. Starting in Q4, we would expect to earn about a 40% FRE margin on the incremental ARCC Part 1 fees. Our incentive-eligible AUM grew to a record $85.3 billion in the second quarter, up 16.5% year-over-year, driven by our flagship funds in our U.S. and direct lending Europeans. European Direct Lending Strategies. Of that amount, over $30 billion is not yet invested and available for future deployment, which represents approximately 96% of our second quarter incentive generating total. The deployment of this uninvested capital represents significant upside potential for both our fee-related earnings and net performance fees in the coming years. Our incentive-generating AUM of $31.4 billion increased 28% year-over-year and currently consists of 63% in credit strategies and 27% in private equity strategies. Mike, I'll close with a few thoughts before opening this up to Q&A.

Great. Thanks, Mike. So, in summary, as you can see, our business continues to steadily expand. We've had a great foundation for future growth and we believe that we're well positioned in what we consider to be a very large and growing addressable market. We have a growing and sticky client base that continues to add funds at a very strong clip and we continue to attract a significant amount of new investors to the platform as we expand our investment solutions and improve our client coverage model across the globe. And while the markets are competitive, We have enduring platform advantages and over 400 very talented investment professionals that enable us to originate and structure unique deal flow and to generate attractive returns for our fund clients and in turn to our shareholders. So excited about where we are and I feel that the forward momentum that we have across all of our internal and external business activities has never been better. As always, we appreciate your time and continued support for our company. And with that, we will now open 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 your question, please press star, then 2. Our first question today will come from Jerry O'Hara with Jefferies. Please go ahead.

Great. Good afternoon, and thanks for taking the question. Perhaps one for Kip, actually. If my notes are right from the ARCC call yesterday, I think the anticipation for moving into the midpoint of that target increased leverage was something along the lines of 12% to 36 months. I was hoping you might be able to elaborate a little bit on what some of the puts or takes might be around how that, you know, that leverage target might, you know, occur, what might slow or accelerate the move into that target. Thank you.

Sure, you're welcome. Thanks for the question. So, 12 months ago, we had decided to push forward, obviously, with the regulatory relief, and there was sort of a one-year delay you know, cooling-off period after the Board approval. And I think it was June 22nd where it became effective. So, we have actually been increasing the leverage modestly at the BDC. But I think the key, I don't know if it's a put or if it's a take, but the key consideration has just been that the investing environment, as I talked about on the call for ARCC yesterday, has just been competitive, challenging, et cetera. So, what we tried to do a year back was give people a three-year model and that's actually on the Aries Capital Corporation website in a presentation you can take a look at that showed the leverage increasing from kind of where our target leverage range is today around 0.75 times up to, again, a maximum of 1.25 over a three-year period. So we feel comfortable introducing more financial leverage on the company. You know, I think we're marching slowly towards one-to-one in our thinking, but the – The key consideration is that we're not just going to get there to get there. We're going to get there only if we find enough exciting investment opportunities and we don't want to lower our bar in terms of what we see as a good investment for that company.

I would just add, Jerry, I think Kip's being appropriately cautious given the market environment, but probably inappropriately modest, because when you look at the current earnings run rate for the company, the company put up a 49-cent core earnings quarter against a 40-cent regular dividend and a 42-cent dividend, including the special. And when you go look at that model, I think the company's positioned itself to be earning core income in line with those projections at a much lower leverage level. So when you look at the profit contribution back to ARIES management, I actually think we're in the enviable position where we're generating the incremental income without taking that corollary risk. And that's been a combination of increased underwriting, and syndication fee income, increased commitment fee income, an unbelievable job repositioning the lower-yielding ACAS assets and the harvesting of gains. So I think there's still considerable upside, but hopefully people appreciate we're already enjoying a new, higher, sustainable level of profit coming out of the BDC based on the fine work that they've done.

That's helpful. And maybe shifting gears to the insurance platform and I guess you kind of touched on the fact that we might be headed into a lower-rate environment, just kind of hoping you might be able to expand a little bit on the growth outlook within that insurance platform, kind of balanced against the backdrop of potentially a lower-rate environment.

Sure. As I said in my prepared remarks, whether we're talking about insurance clients, pension clients, or retail investors, persistently low interest rates, pushes people to be much more active buyers of alternative fixed income product. And given the rate environment that we've been operating under for 10 years, we've come up with a very interesting broad-based suite of products, not just for the insurance community, but for the institutional and retail community at large. What's interesting about insurance, and we've talked about this on past calls, We formed an insurance solutions business here at Aries six or seven years ago with a recognition that based on some of this interest rate-driven behavior, but also some nuances around regulatory capital frameworks and how that's driving investment, that the insurance market would be a very large growth area for Aries and folks like us. And as we've leaned in on that opportunity, we now find ourselves in a position where We manage well over $15 billion of assets on behalf of over 100 separate insurance companies. And we've done a number of very creative, interesting things with our insurance company partners. We spent a lot of time in the ARCC side talking about the very strategic partnership that we've developed with AIG through Varagon and some other foreign insurers around our SDLP product. We've talked a lot about our very strategic partnerships with domestic insurers around our private ABS product and so on and so forth. So this has been a very big area of focus for us. And as I talked about on our last call, the one piece of the puzzle, if you will, that we did not have here was, that Espida now brings is the ability to access the annuity and retirement asset market as the owner of a life insurance platform, a reinsurance platform, and having an internal distribution capability to originate new annuities. So this, to me, is really the next and maybe final piece of the puzzle to complete our capability set. This is a massive end market, I think, telling people what they probably know. Retirement assets are expected to grow to be about $25 trillion by the end of this year. About $230 billion of annuities were written last year alone. And given the issues around the rate environment, having a permanent capital vehicle in the life space that we can use to grow organically or inorganically we think is very exciting. The current transaction on the table may seem small relative to our ambition, but will require a significant amount of ARIES capital and third-party capital as we execute on the strategy going forward. So I think this is something you'll be hearing a lot about over the next coming quarters as we roll out the business plan.

That's great. Thank you. Our next question will come from Michael Carrier with Bank of America Merrill Lynch. Please go ahead.

All right, great. Thanks for taking the question. Mike, the outlook you provided for the FRE margin is helpful. I think you said over the next 18 to 24 months. Realize it's tougher to predict, but given the realized performance fees were a bit lighter in the quarter, yet the net accrued balance continues to build, maybe can you provide some context on either the portfolio or the outlook on how you guys are looking at realization activity given where the seasoning stands of the portfolio? Yeah.

Sure. So, Mike, why don't we start with kind of the indebted crew performance fees. The majority of that dollar amount is in funds that are past their respective investment period, so they're technically in realization mode. I think that's important. As highlighted, we remain in an environment that we think is favorable to dispositions of assets. So the environment we operate in, I think, is conducive for continued realizations. Obviously, for any given quarter, it's hard to predict as things, the timing of when transactions occur is always a bit moving. Things can happen quicker or slower than you anticipate. So that's why we emphasize in the call on the prepared remarks that We really think you've got to look at this over the longer horizon. We did flash, and I'm not saying this is perfect science, but we mentioned over the last 10 quarters, you know, FRE represented on average 70% of realized income. This quarter, I think, was illustrative of a light quarter of realizations, with that number being 82%, albeit also reflecting continued strength and growth of FRE. So I think over the coming quarters and the next year, we still think realizations are going to be attractive. Again, it's hard to give you a dollar number, but as you know, as that net accrued performance fees continues to grow and it's up 20% from year end, what's already baked into valuations, and again, most of that are funds that are in harvesting mode, feels pretty good.

Okay, that's helpful. And then just a quick follow-up. On the deployment side, How would you guys compare maybe the competitive backdrop when you look at direct lending in the U.S. versus Europe, given the fund that you raised and just the competitive dynamics and maybe, I don't know if I want to say the market is more niche-y, yet you guys have some of the infrastructure built out. How does that dynamic play out when you look at deployment in this environment?

Yeah, so this is Kip DeVere. I can take that. Look, we think that the market in the U.S. is materially larger and further along in its development, both in terms of the scale of our U.S. direct lending business and our expectations around deployment. We think that we'll continue, despite the probably more competitive market here in the U.S. than in Europe, deploy more capital in the U.S. direct lending business this year. than we will in the U.K. and in Europe. The counterpoint on the U.K. and Europe is it's, of course, younger in its development. Both the market itself and our business, despite the fact that we've been there for 10 years, we continue to actually add a lot of people. We've opened two new offices recently. And we've got a lot of expectations for growth there as the market matures. But, again, the scale of that business is not as significant yet. It offers a great growth opportunity, and its deployment will be, you know, lesser than what we expect to deploy here in the U.S.

Just one quick follow-on tip. As we mentioned in the script that we've talked about in prior quarters, The value of the incumbent relationships that we develop as the business scale should not be undervalued. When you look at the U.S. direct lending deployment, I think this quarter 60% of deployment or close to it was actually into existing borrowers. We've seen numbers in our European business approach 30% to 40%. I believe this quarter it was still 25%. So it's a good indication of the type of value that we're creating just given the size of the business and longevity we have. And so when you think about the relative markets, the U.S. being slightly more competitive, we have a much larger incumbency benefit that allows us to defend more so than we have in Europe just given the state of development. But obviously Europe is quickly catching up.

All right. Thanks a lot. Our next question will come from Craig C. Valor with Craig Suisse. Please go ahead.

Thanks. Good afternoon, everyone. Just a follow-up first with the life business. Can you help us frame the organic growth potential of Pavonia Life, including both new business and reinsurance? And also, I wanted to see if you could help share with us what the arrangement looks like between Aries and Espida. Okay.

So as I mentioned, what's interesting about this transaction is Aspita purchased two quote-unquote assets, if you will. One is Pavonia Life and two is the distribution and servicing company. So we've added about 175 folks in that capability at Aspita to manage the growth. We can't tell for sure what the go-forward organic growth will be, but as I mentioned in the prepared remarks, last year that distribution engine, if you will, originated $1.8 billion of new assets, and we would expect with continued investment that we can meet or exceed those types of targets. With regard to reinsurance, that's a little bit harder to predict. Obviously, given our relationship with the insurance community, we think that that's going to be a meaningful piece of the growth story here. The best thing I could do there, Craig, is really just have you look at the market, the transactions that are occurring in the market, what some of our peers have been able to accomplish here to get our general sense. But I think over time, that's a multi, multi-billion dollar opportunity for the company as well.

Got it. And, Mike, I guess $2 billion of gross organic means something smaller than that when you consider a net due to runoff. But just for my second question here, given the current investment backdrop, when can we see Ares get back out there and raise a sixth global buyout fund?

As I mentioned, our expectation is, given where we have been on deployments, in our Fund 5 that we are moving very quickly to the stage where we're going to put Fund 6 into the market. So as we talked about going into 2020, I think that that's one of the flagship funds that people should expect.

Thanks. Mike, sorry if I missed that earlier.

Nope, no worries.

Our next question will come from Chris Harris with Wells Fargo. Please go ahead.

Thanks. Question for you, Mike. You sold a decent amount of ARIES stock recently, so I wanted to give you an opportunity to address perhaps why you did so and then how you might answer somebody who thinks this could be a potential red flag.

Sure. I guess meaningful is all relative, just so that people appreciate that. I believe I sold a million shares, which represents, I believe, close to five or six percent of my total holdings. I've been here building this business with my partners for over 15 years and have never sold a share of stock. I think, as people know, I do not take any salary or bonus. And the bulk of my compensation comes through distributions on the stock and obviously stock price appreciation. My net worth is heavily concentrated in ARIES stock and ARIES fund product. I am young but getting older. I have a family and I am doing what I think most people do, which is move towards diversification and estate planning. And I think it should be read as nothing more than that, particularly when you think of it as a percentage of my net worth and concentration in ARIES stock and ARIES product.

Thanks for that, Mike. I just want to squeeze in a follow-up question on the insurance initiative. Can you guys talk a little bit about the team at ARIES that is focused on building this out and growing it?

Sure. So the team is led by a gentleman named Dave Riley, who has been a partner at ARIES now for over 10 years, comes to the platform with a lot of insurance expertise. and is supported by a dedicated team here of, call it eight to 10 people, depending on how we calculate the FTEs. As we continue to build out the insurance solutions business, it's really broken down into asset management, capital solutions and capital allocation, as well as what I would call strategy and M&A in terms of how the teams are spending their time and allocating the time. Now, as we continue to build out the LifeCo, I think you'll see us adding resources first on the investment management side as we try to broaden out our capabilities to be more relevant to Espita and other insurance clients as the market grows, and then probably secondarily in the solutions business as we continue to try to be a good consultative partner for our our insurance partners. So the Ares Insurance Solutions Group will grow, and then as I mentioned, Espida Financial has over 170 employees, and as the company continues to grow, I think that number will expand as well.

Our next question will come from Robert Lee with KBW. Please go ahead.

Good afternoon already. Thanks for taking my question. I guess the first question to have is to talk a lot about European expansion. You've been there for a while. But a lot of peers, in addition to Europe, have clearly put Asia as a priority. Could you maybe just update us on your thoughts there in terms of opportunities or intermediate-term investments you're making Asia broadly?

Sure. So I think as you mentioned, Rob, we've had a very good experience building our European franchise organically and inorganically, and we learned a lot in terms of the ingredients for success, things around hiring local talent with what I would call Western investment capabilities and experiences. funding those businesses locally, building strong partnerships in the region. We've learned a lot about organizational design to kind of manage the span of control issues and inevitably come up when managing faraway geographies. And so we're applying that to our organic build in Asia. which up until now has been largely focused in and around our growth and private equity capabilities with dollar-denominated and RMB-denominated growth equity funds. As we talked about on the last two calls, I believe growth in Asia is one of our most significant strategic priorities. For many, many years, for a whole host of reasons, I think Asia has been not as investable as other geographies. We're beginning to see that shift. And so through a combination of organic and potentially inorganic growth, I think you'll continue to see us driving scale into that region.

Great. And maybe just to follow up on the flagship fundraisings, I mean, is there any reason to think from where you sit today as you look ahead that you wouldn't experience your kind of what has been kind of the traditional 25%, 30% upsizing on a successor of funds at this point?

No. You know, again, it's interesting because on some of the larger funds, we've actually been seeing closer to 40% sequential growth. As I mentioned, when you look at where the new capital is getting raised, it's been 70% plus from existing investors with very high re-up rates on sequential flagship funds. So one of the reasons we always have such high conviction around that 20% plus growth rate on flagship funds is we're seeing 70% to 80% re-up. with incremental increases in capital commitment. So almost by definition, we're going into a lot of these fundraisers at the prior fund size before we allow new investors into the product. So I would expect that to continue for the foreseeable future.

Great. Thanks for taking my questions.

Thank you.

Our next question will come from Michael Cypress with Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for taking the question. I just wanted to follow up on the insurance initiatives. I was just hoping you could talk a little bit about how you see your approach with the insurance initiative as being, how it's differentiated versus others in the peer set. And as you look out over the next, say, three to five years, how will it look like, I guess, what's success to you? If it is successful, what does that look like and what metrics will you be looking at to assess that?

Sure. So, again, I don't know what other people are doing. I have a general sense, and I think everybody is seeing the same opportunity in insurance, whether that is effectively delivering alternative product to a retail end user through annuities or continuing to create product for insurance company clients in the below investment grade or high-grade fixed income space. So over time, I would expect that we and the other large alternative managers will continue to gravitate towards similar business models. I think we are somewhat uniquely positioned when you look at our product set. And if you go and look at the slide deck that we put out upon announcement of the transaction, so much of what we're building here from a product and capability set is really geared around this alternative fixed income product. and a lot of that is in response to the growing demand coming through the insurance channel. I would define success really first and foremost by are we delivering good value to our annuity buyers, and are we delivering best-in-class investment solutions and returns to our insurance company partners? And if we're doing that, similar to everything we've done elsewhere on the platform, if we perform well, we'll grow. So we're going to be primarily focused on performance, and I think with that we'll get growth. In terms of the base case, as I said, I think that we would be disappointed if under our ownership and leadership that we could not see organic growth on the annuity side of the business consistent with this platform's past levels, which in and of itself would create a substantial capital relationship that could be very exciting for us. And then on the reinsurance side, again, I think that's going to be a little lumpier in terms of how that grows inorganically and the types of partnerships that we can develop with our insurance company clients. But when you look at some of the peer companies and the scale of what they've been able to accomplish with their annuities platforms and reinsurance companies, I think there's just a ton of white space that's available to us.

Thanks for the color. And just a quick follow-up, a separate topic just on real estate. I just hope you could talk a little bit about how you're thinking about accelerating growth in the real estate franchise. And as you look across the business today, I guess, what sort of gaps do you see and do you need any sort of an acquisition to help further accelerate that and make it a much more meaningful portion of the Ares platform?

Sure. So, Real estate is performing very, very well. And if you look at the public information that we make available, you'll actually see that from a fund performance standpoint, our real estate private equity funds are performing extremely well and are frankly leading the charge right now across the platform in terms of their fund level performance. Building off of what I just said, it's very easy to scale a business with that kind of performance, and suffice to say we're leveraging that into newer funds and larger funds. And I would expect to continue to see that growth. So if you look at what we're doing organically in that business, similar to what we're seeing in the rest of the platform, we're growing that business 15% to 20% a year organically with very good margin growth. albeit the margins are still lower than some of the more mature scale businesses, but they're well on their way quarter over quarter. In terms of the businesses that we're not in, where I think that we could have meaningful growth opportunity, our real estate lending business, while it is substantial and growing, We're creating new product in that business, specifically around some open-ended fund products that are showing significant growth promise. I think we have a meaningful opportunity to grow our real estate lending business in Europe on the backs of what we think is the best-in-class franchise in that market for real estate PE. We continue to build off of our opportunistic track record to create broader development opportunities capabilities and I wouldn't be surprised to see us getting into the development to core business or the core business itself over time. A lot of those capabilities already reside here in areas so the question of acquisition versus organic growth I think is going to be less about are there capabilities that we want to acquire versus do we believe that getting scaled in any one of these particular markets or products is important enough that we're going to acquire that scale through acquisition. And that's an ongoing discussion here, and it's the same conversation we have in every business. But we couldn't be happier with the state of the real estate business in terms of the fundamental fund performance, but also the growth trajectory thereon.

Great. Thank you. Our next question will come from Kenneth Lee with RBC Capital Markets. Please go ahead.

Hi, thanks for taking my question. Just one on Aspita Financial, the insurance platform. How would you anticipate, would you anticipate the capital that could be available to do inorganic acquisitions through reinsurance transactions to come mainly from third-party sources? And if so, how would that likely be structured?

Yeah, so as we've already publicly announced, the initial platform acquisition will require somewhere between $75 and $100 million of capital, and that will be coming from Ares Management as we control the platform and organize it the way that we'd like it to be organized. Going forward, the need for capital here will be pretty significant, both to support and capitalize the organic growth as well as the inorganic growth. Ares Management will continue to support the growth with its own capital, but will also be looking to some of its meaningful strategic LPs to help support the business as well. Gotcha.

And then just one other question. In terms of the prepared remarks, you mentioned there's one to two expected portfolio realizations in the second half. I wonder if you could just disclose either which areas or any other further details as you can about those realizations. Thanks.

We don't really talk about specific realizations, so unfortunately I'm not going to give you the specific names. We have made some public announcements about some significant exits in our private equity portfolio, which I think are available to folks, and I'd encourage you to track that down. But I would just reiterate what Mike McFerrin said, which is when you look at where we are from a harvesting and positioning standpoint, 90% of that available performance fee is actually in funds now that are past their investment period. So as we're moving into this next phase of flagship fundraising, I think you should start to see the realizations accelerate over the next couple of quarters.

Gotcha.

Thank you. Our next question will come from Alex Blussnane with Goldman Sachs. Please go ahead.

Hi, good afternoon. This is Daniel Jacoby filling in for Alex. Thanks for taking my questions. Just circling back to the FRA margin, I appreciate the guidance. I guess if we just take a step back and think about this kind of bigger picture, management fees are tracking up about 20% year over year. And if I look at the margins, they've only expanded about 20 basis points. I guess while we recognize that there's significant investment in the business and there's ramping of new products, Are there, you know, structural reasons why the margins can't converge a little bit closer to sector averages, you know, closer to something in the 40% range over the next few years? And maybe just a little bit of color helping us bridge that gap from kind of the management fee growth versus the more modest margin expansion would be helpful. Thank you.

Sure. So, I mean, I think if you look just – I mean, when you talk about the 20 bips, margins have been expanding more than that. If you look a couple years ago, we had a 28% margin that had grown to a 30. This quarter, I think from last quarter sequentially, it was up 50 basis points if I round out. So when we voice in our prepared remarks, we think this will hit 32% this year. And over the next 18, 24 months, continue. If I was just to kind of project out a path to the mid-30s from where we are, that kind of feels like something along a path of around 50 basis points of margin expansion per quarter. So I think what's happening is as we've invested, you know, one thing we've talked a lot about in the past is we invest heavily in capabilities to raise, invest, support the capital we have. And such a significant amount of that capital pays us off invested assets, which is why the AUM not yet earning fees is such a large number and continues to grow meaningfully. And expenses run in front of it. So when you looked at how much capital we've raised over the couple years, the strong pace of deployment we've had over the last couple years, the expansion of new strategies and extended capabilities, all that's consistent with continuing to put expense in those businesses where we're now having the benefit of great visibility on the fruits of that labor coming to bear over the next couple years with those management fees falling as the capital is put to work. And that's why you see management fees taking up at north of 20%. And, look, I think the margin continuing to elevate is going to be a function of deploying that capital and the revenues starting to match up with the expenses that came in front of them. As far as our peers go and the margins you referenced, I think you have to look at things more on an apples-to-apples basis by business. Some of our peers have us. you know, a decent amount of their income coming from transactional-oriented fees or other advisory-type businesses or capital markets businesses. Our core earnings is driven by management fees. We could get into a lot of specifics, but we believe our model for us is the right one. We think it has the right alignment of interests with our private fund investors. And we think we have... very stable as we continue to demonstrate growing core earnings. But the margins, again, was why we were comfortable putting out there a little more clarity around a timeline of how to get to a place that we think would be really good, which is over the next few years.

Got it. Thank you. That's a very helpful caller. And then just one other kind of modeling cleanup question. Just on the share count, we've seen that creep higher recently. you know, for several quarters now. Any coloristic kind of what's driving that creep? And I guess within the context of I think in the past you guys have pointed to a share count neutral strategy. So, you know, is there any updated thinking around kind of the share count strategy and the path from here?

Excuse me. The share count has ticked up from investing last the vesting of employee awards primarily. So that's what you've seen happening during the course of the year. That doesn't happen as different awards have different dates associated with them. It doesn't all happen the same date. Our IPO was now more than five years ago, so certain lockups expired around that. The share repurchase program, as you'll see disclosed in our 10Q report, We did actually have our inaugural share repurchases during the quarter. We repurchased 400,000 shares at an average price of $26.12. We've begun that. It is our objective to pursue a share count neutrality strategy from employee awards. Again, it's an objective versus a black and white, we're definitively going to do it, but it's how we, one of the intended uses of the earnings we retain from performance fees was to pursue that strategy.

Got it. Thank you for all the color.

At this time, we are showing no more questions in the question queue. I would like to turn it back to Mike Arrigetti for any closing remarks.

Great. Well, thanks, everybody, for spending so much time with us today. We appreciate the continued support and all the great questions and look forward to speaking to everybody next quarter. And enjoy the rest of the summer. Thank you.

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 August 31, 2019, by dialing For all replays, please reference conference number 101-31886. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Thank you.