Ares Management Corporation

Welcome to the Aries Management Corporation's second quarter earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Wednesday, August 5, 2020. I would now like to turn the conference over to Carl Drake, head of public company investor relations for Aries Management. Please go ahead, sir.

Good afternoon, and thank you for joining us today for our second quarter 2020 conference call. I am 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-chairman of our private equity group, Kip DeVere, head of our credit group, and Matt Swartney, a co-head of our private equity group, will be available for the question and answer session. Before we begin, I want to remind you that comments made during this call contain forward-looking statements and are subject to risks and uncertainties, including those identified in our risk factors in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. During this call, we will refer to certain non-GAAP financial measures, which should not be considered an isolation from or a substitute for measures prepared in accordance with generally accepted accounting principles. In addition, please note that our management fees include ARCC Part 1 fees. Please refer to our second quarter earnings presentation available on the industrial resources section of our website for reconciliations of the measures to the most directly comparable gap measures. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any area's fund. This morning, we announced that we declared our third quarter common dividend of 40 cents per share representing an increase of 25% over our dividend for the same quarter last year. The dividend will be paid on September 30th, 2020 to holders of record on September 16th, 2020. We also declared our quarterly preferred dividend of 43.75 cents per Series A preferred share, which is payable on September 30th, 2020 to holders of record on September 15th. Now we'll turn the call over to Michael Arrighetti, who will start with some quarterly financial and business highlights.

Great. Thanks, Carl, and good afternoon, everyone. I hope everyone is healthy and safe, and I wish you and your families well. So now with a full quarter of the impact of the COVID pandemic behind us, we're pleased that our results continue to be strong, and we couldn't be more proud of how our employees have adapted to the current challenges. Our consistent revenue and earnings growth reflect our resilient management fee-centered business model and our steady growth in clients and AUM in the global market for alternative investments. Our second quarter was our 13th consecutive quarter of sequential fee-related earnings growth with FRE of $97 million, an increase of 26% in the same period last year. In addition to reporting record FRE, Our second quarter also set new records for most of our other key metrics, including management fees, AUM, and fee-paying AUM. Our second quarter FRE margins reached a post-IPO high as we continued to gain efficiencies of scale and experienced slower operating expense growth. The second quarter was one of our best fundraising quarters ever, with more than $9 billion raised, including approximately $5 billion from funds in our private equity group, and our momentum across the platform is continuing into the second half of the year. Our strong fundraising has set us up well for future growth in management fees and earnings, which could be seen by the sharp increase in our available capital and shadow AUM, as Mike McFerrin will discuss in a little bit. From a market perspective, the traded equity and debt markets have been very volatile in the first half of the year, with a quick, dramatic sell-off in March 2021, followed by a historic rally in the second quarter as fiscal and monetary stimulus poured in with unprecedented speed and scope. In the first quarter, we invested aggressively into the public-traded markets during the dislocation, and in the second quarter, as markets rebounded, we pivoted more toward private investing with an emphasis on rescue capital and assisting larger companies with flexible capital solutions. While actions and policies by the federal government and the Fed have clearly helped provide interim support to the economy and markets broadly during this period, we do think that we're still in the early days of the economy feeling the broader knock-on effects from this crisis. We continue to believe that tradable market technicals are disconnected from economic fundamentals, and we're planning for a slow and uneven recovery over the next few years. We believe investment opportunities with outsized returns will be available to those of us with patience, capital, and differentiated capabilities. As we've talked about before, and we'll do more so on our call today, we believe that we're well-positioned to take advantage of this dynamic. There are two strong long-term trends that have benefited our business for many years and have only accelerated with the pandemic. First, on the investing front, The benefits of our scaled self-origination capabilities and our flexible approach have become even more valuable in volatile markets as investment opportunities pivot between public and private markets. Our coverage and significant relationship network enable us to source attractive opportunities, uncover relative value, and take advantage of inconsistent market competition, particularly for larger companies. So while transaction activity today is generally slower, the competitive environment has significantly improved, with many competitors tending to their existing portfolios, reducing workforces, or unable to access attractive forms of new capital and liquidity. Many banks have retrenched in both North America and Europe, making it difficult for certain companies and assets to attract capital. This has resulted in opportunities for skilled players like ARIES, to step in where the trading markets are not available or are not as attractive. As an example, in the second quarter, we led the largest Unitronch private credit financing ever completed, a nearly £2 billion sterling private financing for a leading insurance brokerage company in the UK. This transaction is a great example of what we're capable of executing for our clients and why many of them turn to private capital for enhanced flexibility and relationship purposes. In this case, we had both UK and US relationships with the company sponsors, and we were able to structure a bespoke solution that met the company's growth needs. As a result, we were able to invest a substantial amount of capital across both our US and European direct lending funds. Our bias towards structuring our funds to be as flexible as possible is an even greater advantage in today's market environment. As an example, during the second quarter, our alternative credit team led a $400 million transaction for a publicly traded mortgage REIT. We were able to structure an asset-oriented solution, which included a term loan with warrants that enabled the REIT to shore up its financing and go on offense with respect to new investments and potential acquisitions. Also of note, our special opportunities team sourced a $400 million investment solution for another public company, which operates in the outdoor advertising sector in the form of a convertible preferred. Our teams are focused on helping companies strengthen their financial foundations and enable them to go on offense and consolidate market share. Overall, during the second quarter, we deployed $4.7 billion in our drawdown funds compared to $4.1 billion for the same period a year ago, primarily in global direct lending, alternative credit, and our special opportunity strategies. The second major theme is that investors are continuing to consolidate their relationships and place more of their wallet share with trusted, larger-scale alternative managers with broad product sets. In this environment, it's been difficult for investors to diligence new managers, which is leading investors to commit more capital with known relationships. The case for investing in alternatives has also been strengthened, given the heightened market volatility in the traded sectors and near zero interest rates. These factors can all be seen in our strong fundraising statistics year-to-date and our strong pipeline. For the first half of the year, we have now raised $15.7 billion organically, excluding the $2.7 billion in AUM from the Denali purchase in Q1, which now puts us on track for one of our best fundraising years ever. This is even more impressive since none of our large corporate direct lending commingled funds held an LP closing in the first half of the year. Year to date, we've raised capital directly from 139 institutional investors, including 83 existing areas investors and 56 new to our platform. The existing investors accounted for 78% of the capital raised, which we believe is a testament to our consistent and strong performance and and the deep relationships that we've built with many of them over time. Specific to our second quarter fundraising, approximately $5 billion was raised by funds in our private equity group. Our special opportunities fund closed on $1.5 billion during the second quarter, concluding its fundraise at $3.5 billion, well in excess of our $2 billion target. Our sixth flagship corporate private equity fund, which held its first closing during the second quarter, closed on approximately $3.5 billion, with 90% coming from existing investors. This $7 billion of capital raised by our PE group means that we're well on our way towards our goal of having at least $10 billion between the two funds to target investments in this attractive environment for stressed and distressed investing, as well as for traditional private equity transactions. We also raised $3.9 billion across our credit strategies, which included commitments to public vehicles, new commitments to managed accounts, and funds and additional closings on our flagship commingled alternative credit fund. Our alternative credit fund now stands at $1.6 billion towards its $2 billion target, and we continue to expect to meet or exceed our $2 billion target by the end of the year. We also saw about $400 million of additional commitments to our real estate funds, where performance has been consistently strong. Our fundraising momentum is continuing, and our entire organization is highly focused on surpassing at least $30 billion of capital commitments this year, which we've only done once before in 2018. We currently have at least nine commingled fundraisers either in the market or to be launched in the next six to nine months, including our four largest private commingled successor funds. These nine funds showcase the breadth of our offering, and together represent at least $25 billion of incremental equity capital commitments targeted to be raised through the end of this year and into early 2021. They include our fifth European Direct Lending Fund, our sixth Corporate Private Equity Fund, our second U.S. Junior Capital Direct Lending Fund, our second U.S. Senior Direct Lending Fund, our Alternative Credit Fund, two Real Estate PE Funds, the third Asian secured lending fund from our new Aries SSG colleagues, and our climate infrastructure fund. We launched our fifth European direct lending fund in May, and it's targeted to be the largest fund in our firm's history. We've seen strong client interest so far, and we expect a significant first close in the coming weeks. In addition, outside of these highlighted funds, our fundraising efforts will certainly continue with our managed accounts and strategic partnerships, our public funds, other commingled funds, and closed-end vehicles, all of which traditionally account for a sizable amount of our annual capital raised. We're happy to see that our investors are highly engaged. They've ironed out their work-from-home investment processes, and they recognize the attractive investment opportunities that can arise during periods of significant volatility. By extending our wallet share with our clients, which include leading pension funds and sovereign wealth funds, insurance companies, private banks, and others, we believe that we have a long runway for growth as our clients further expand into alternatives, and we have the opportunity to gain share from manager consolidation. In addition, our leading credit, private equity, and real estate franchises continue to attract a steady stream of new investors, and we believe this will only be strengthened with over 115 institutional investors being onboarded with the closing of the SSG capital transaction. of which approximately 90 are new to ARIES. We also continue to see an attractive rate of re-ups into larger existing strategies and a desire to commit new capital into other ARIES strategies. Turning to a few other highlights in the quarter, we saw a nice snapback in performance across most of our funds in Q2. The performance was led by our most liquid credit strategies, which rebounded about 9% or more, and both our loan and high-yield strategies continue to outperform their respective benchmarks on a year-to-date basis. Our European direct lending composite and a significant U.S. direct lending fund, Aries Capital, which were both less volatile in the first quarter compared to our liquid funds, returned around 2% and 4% respectively for the second quarter. Our European and U.S. real estate equity fund composites, which have limited exposure to hospitality and retail properties, continued their resilient performance with gross returns of more than 3% for the second quarter. Our corporate private equity fund composite rebounded nearly 5%, driven by strong performance in our public positions, which helped us recapture most of the decline from the first quarter. our private equity composite performance would have been up more than 20% for the quarter, excluding energy. Given investor sentiment, expected challenges in the energy industry, and volatility, we, like certain other managers, are excluding energy from our latest corporate private equity fund. These activities will be completed outside of our six funds and in our dedicated energy funds going forward. From a monetization perspective, The markets continue to be slow for most regular way buyout investing, and realizations are likely to remain slow in the near term. On the positive side, transaction activity is in the early stages of a recovery, which bodes well for perhaps late 2020 or 2021. The public equity markets have rebounded sharply, creating potential monetization opportunities and capital access for certain non-COVID impacted sectors. During the second quarter, we took advantage of the market uptick and generated realized income from the sale of a portion of our floor and decor position in ACOP3. In addition, one of our portfolio companies in ACOP4, the AZAC company, went public through a highly successful IPO in the industrial sector. By the end of the second quarter, AZAC had generated an additional unrealized gain of approximately $1 billion relative to the first quarter. Also, within private equity, we recently completed the sale of our infrastructure and power teams investment in Aviator Wind, the largest single-phase, single-site wind power project in the U.S. This project, which includes power purchasing agreements with two of the 50 largest companies in the U.S., highlights the growing demand for renewable energy in corporate America. So lastly, before I turn the call over to Mike, I want to provide a brief update on our SSG capital transaction, which closed in July. As we said before, we believe the transaction further expands our global leadership position in private credit and enhances our ability to expand our investment capabilities across a strategic and high-growth region. For the past decade, SSG has established itself as one of the leading secured lending and special opportunities investors across the Pan-Asian region and is widely recognized by institutional investors and the corporate communities that they target. The team's experience, long tenure, and track record are particularly valuable in the current market environment. Like other parts of the platform, SSG continues to successfully expand its capital base with a recent closing of approximately $800 million on its latest secured lending fund, bringing its AUM as of June 30th to $6.9 billion. Going forward, we expect ARIES SSG will capitalize on the growth opportunity using its broad Pan-Asian footprint and seek to replicate the success that we've achieved scaling and diversifying our business across North America and Europe. In addition, our new strategic partnership with SMBC further expands our relationships and connectivity in the region, which we expect will only bolster our opportunities. And now I'll turn the call over to Mike McFerrin for his remarks on our business positioning and the quarter's financial results.