Ares Management Corporation

Welcome to ARIES Management Corporation's third 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, October 28, 2020. I will now turn the call over to Carl Drake, Head of Public Company Investor Relations for ARIES Management. Please go ahead.

Good afternoon, and thank you for joining us today for our third quarter 2020 conference call. I'm joined today by Michael Irrigatey, our chief executive officer, and Michael McFerrin, our chief operating officer and chief financial officer. In addition, we have a number of executives available for the question and answer session today, including Bennett Rosenthal, co-chairman of our private equity group, Kip DeVere, head of our credit group, Bill Benjamin, head of our real estate group, and Matt Swartnant, co-head of our private equity group. 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 within our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please 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 as a substitute for measures prepared in accordance with generally accepted accounting principles. In addition, note that our management fees include ARCC Part 1 fees. Please refer to our third quarter earnings presentation available on the investor resources section of our website for reconciliations of the measures to the most directly comparable gap measures. Nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any ARIES fund. This morning, we announced that we declared our fourth quarter common dividend of 40 cents per share, representing an increase of 25% of our dividend for the same quarter last year. The dividend will be paid on December 31st, 2020 to holders of record on December 17th, 2020. We also declared our quarterly preferred dividend at 43.75 cents per Series A preferred share, which is payable on December 31st, 2020 to holders of record on December 15th, 2020. Now I'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 you're all healthy, and I wish you well. Despite the broad effects of the COVID crisis, we continue to execute well across all of our core functional areas with record-setting third quarter results. Our third quarter saw year-over-year growth of 24% in our assets under management, driven by a record quarter of fundraising. 23 percent growth in our fee-related earnings, and nearly 50 percent growth in our realized income as we monetized some investments in a strengthening equity market. We also continued to see the benefits of scale as we reported our highest FRE margins since our IPO. I'm also pleased to say that our fund performance was generally strong against the backdrop of an improving economy and favorable technicals in the liquid markets. Going forward, we continue to believe that our business is well-positioned to grow fee-related earnings by at least 15% per year in the years ahead. During the third quarter, our deployment was a little more measured compared to previous periods, as market transaction activity was slower and in transition. During the third quarter, we invested $3.9 billion from our drawdown funds versus $4.7 billion in the second quarter, with a continued focus on providing scaled, flexible solutions to private companies, particularly in our global direct lending, special opportunities, and alternative credit strategies. We are starting to see a significant pickup in M&A transaction activity in both North America and Europe, which we expect will create a healthy backdrop for both deployment and monetization. We're also seeing some interesting opportunities for undervalued assets in certain sectors within the public markets, such as real estate, where there's been considerable volatility. For example, we recently made a convertible preferred investment in a Zurich-based publicly traded residential property owner with attractive German assets. We believe significant underlying value exists in this stable asset class in a core European market. Also, just last week, we announced that we're partnering with a specialized asset manager and a take private of a public single-family rental company where we see an opportunity for value creation. This last deal is a perfect example of how we're collaborating more actively across our platform and leveraging our scale, our deal flow, and unique market information to navigate the current environment. In this specific situation, funds managed by both our real estate equity and alternative credit strategies collaborated to bring a flexible and scaled solution to this company. This was a natural fit for our real estate strategy given our leadership's experience in the asset class. And it also fit well with our alternative credit strategy, which looks for diversified pools of assets with strong contractual cash flow. As another example, our special opportunity strategy recently partnered with our direct lending team to commit to a first lien rescue capital facility to a global leader in the transportation industry. Now turning to fundraising, the case for investing in alternatives continues to be very compelling. Investors remain frustrated with low interest rates and the dual challenges of high valuations and volatility in the traded markets. In addition, the long-term trend of investors consolidating their relationships among fewer trusted managers with a broad product offering is ongoing. We continue to expand our wallet share with our clients, and we believe that we have a long runway for growth as they increase both their alternative allocations and their LP fund commitments across our platform. We continue to see evidence of this in the attractive re-ups into existing strategies, coupled with a desire to commit new capital across multiple other ARIES strategies. The third quarter was our largest fundraising quarter ever, with $12.7 billion of organic gross capital raised, which puts us at more than $28 billion for the first nine months. Year to date, we've raised capital directly from over 250 institutional investors, including approximately 150 existing Ares investors and 100 new to our platform. The existing investors accounted for 81% of the capital raised, which we believe is a testament to our consistent and strong performance and the deep relationships that we've built with our investors over the last 20 plus years. Specific to our third quarter fundraising, approximately $8.2 billion where more than 7 billion euros was raised from the initial closings for our fifth flagship European Direct Lending Fund that was launched just five months ago in May. We're already nearly 10% above our previous fund size, and we're well on our way to hitting our target for LP commitments of 9 billion euros. Once finished, we expect that this will be the largest ever European Direct Lending Fund, which reflects our market leadership in this attractive and growing segment. To date, 89 investors have committed, including 65 existing investors and 24 new investors. And of note, eight investors committed 250 million euros or more to the fund. During the third quarter, we also continued to make progress with additional fund closings, totaling approximately 3 billion across our other credit strategies, including alternative credit, liquid credit, and U.S. direct lending. Of note, post-quarter end, our alternative credit flagship fund reached its original target of $2 billion. Given the considerable investor momentum and strong investment pipeline, we're planning for additional closings in the coming months before concluding the fundraise. Our alternative credit strategy has increased its AUM by more than 50% in the last six quarters and remains a significant future growth opportunity for us. Our sixth flagship corporate PE fund has closed on commitments of $3.7 billion to date. We expect to hold another closing by year end and plan to hold the final closing in the first half of 2021. We've initiated toehold investments in the fund, and as we sit here today, we have a strong pipeline of both traditional and distressed opportunities. We also had initial closings of $235 million in our climate infrastructure fund that focuses on the energy market transition. and additional inflows to ARIES SSG's Senior Secured Direct Lending Fund, which is now approaching $1 billion in commitments. Our fundraising momentum is continuing into the fourth quarter with a significant forward pipeline. If folks recall, we shared on our last quarterly call that we were focused on surpassing $30 billion in gross fundraising commitments for the year. Based on incremental closings in October, we've already achieved that goal. and we believe that there's an opportunity to meet or exceed our record fundraising year of $36 billion that we saw in 2018. Looking forward, we currently have over a dozen commingled fundraisers that either are in the market or expected to be launched in the next 12 months. And collectively, these funds are targeting equity capital commitments of more than $25 billion incremental to the amounts that we have closed through the end of the third quarter. Outside of these commingled funds, our fundraising efforts will certainly continue with our managed accounts and strategic partnerships, public funds, other commingled funds, new funds, and various closed-end vehicles, all of which traditionally account for a significant amount of our annual capital raised. We saw positive fund performance gains across our significant funds in Q3. The performance was led by strong returns in our corporate private equity and special opportunity strategies which generated quarterly gross returns between 6% and 9%. Our European direct lending and liquid credit composites also generated gross returns ranging between 2.7% and 4.5%. Our U.S. flagship direct lending fund, Aries Capital Corporation, continued to see improved performance with a third quarter net return of 6.5%. Our real estate equity composites also generated positive quarterly returns, ranging from approximately 2% to 6%. From a monetization perspective, during the third quarter, we took advantage of the strengthening equity markets, and we generated realized income from the final sale of our floor and decor position in ACOF III. In addition, we sold a minority position in ACOF IV portfolio company, the AZEC Company, which completed an IPO earlier in the year. We're so happy to see both companies prospering in the public markets. And as the private market backdrop is now improving and equity markets continue to be strong, we'll continue to be opportunistic on the monetization front. So lastly, before I turn the call over to Mike, I want to provide a brief update on our insurance initiatives through our Ares Insurance Solutions platform. Last month, we announced that our subsidiary, Aspita, is acquiring the reinsurance subsidiary of FGL Holdings, and that it entered into a strategic partnership with FGL Holdings for a flow reinsurance agreement. Once closed, we believe this platform will accelerate our plans to grow Aspita both organically through additional reinsurance transactions and through possible acquisitions. Our growth plans remain the same, and we continue to expect to support this ARRI-sponsored insurance and annuity platform largely with third-party capital. Of note, We continue to enhance our leadership team within Aries Insurance Solutions, as we just added Raj Krishna, the former CIO of F&G, as our CIO for Aries Insurance Solutions. And now I'll turn the call over to Mike McFerrin for his remarks on our business positioning and financial results. Mike?

Thanks, Mike. Hello, everyone. I hope all of you are safe and well. I'd like to begin with some high-level comments in the quarter before turning to a more detailed review of our results and financial position. The third quarter marks our 14th consecutive quarter of FRE growth, which highlights the strong growth trajectory of our overall business and the benefits that we are deriving from greater scale. As Mike highlighted, this quarter represents several new financial milestones for the business with our largest ever quarter of capital raising, our largest single first close of a fund with our fifth flagship European direct lending fund, quarterly FRE in excess of 100 million, record AUM, fee-paying AUM, dry powder, and AUM not yet earning fees. In addition, we close on our acquisition of SSG Capital at the beginning of the third quarter, adding approximately $6.9 billion in AUM and $4.3 billion in fee-paying AUM. In connection with this acquisition, we are reporting ARIES SSG within strategic initiatives, along with other strategic ventures that will include Espida, upon the closing of its F&G reacquisition. With that, I'll go through the details of the quarter. Fee-related earnings for the quarter totaled $106.8 million, an increase of 23% from the third quarter of 2019. Year to date, our FRE of $297 million was up 26% compared to the same period last year. This growth, despite the economic fallout from COVID-19, illustrates the resilience of our business and the trust our investors have in us. Our continued FRE growth demonstrates the durability and consistency of our management fee-driven business model. Our results for the quarter reflect an FRE margin of 35%, up from 33% a year ago, and we expect to continue to deliver further margin expansion. Based upon the timing of deployment and market conditions, we believe that we can grow margins by 150 to 300 basis points per year and target achieving a run rate 40% margin within three years, if not sooner. With 12.7 billion of gross fundraising this quarter, our AUM and fee-paying AUM reached new highs, increasing 24% and 21% respectively over the last 12 months. This fundraising drove our shadow AUM to a record high of 39.3 billion for the quarter, an increase of nearly 50% year over year. Our management fees totaled $300.1 million for the quarter, which represents a 15% increase over the prior year. In comparison, total expenses consisting of compensation and G&A were $198.2 million, representing an 11% increase over the prior year. Realized income for the quarter totaled $146.4 million, which represents an increase of nearly $50 million, or 49%. as compared to the third quarter of 2019. Our private equity group recognized over $1 billion in realizations in the third quarter, driven mainly from sales in floor and decor and the ASAC company, which contributes to our year-over-year increase in realized income. After-tax realized income per share of Class A common stock, net of preferred stock distributions, was 48 cents for the third quarter, an increase of 41%, from the third quarter of 2019. Next, I'll turn to our AUM and related metrics. As of September 30th, our AUM totaled 179.2 billion, compared to 158.4 billion for the second quarter, a quarterly increase of 13%. Our AUM growth was largely driven by gross new capital commitments of 12.7 billion, significant market appreciation of over 4 billion, and $6.9 billion from the SSG capital acquisition. Year over year, our AUM has grown 24%. Our fee-paying AUM increased 21% year over year, driven by meaningful deployments in our global direct lending, special opportunities, and alternative credit strategies. We ended the third quarter with $112.7 billion of fee-paying AUM, which breaks down approximately 72% credit funds, 16% private equity funds, 8% real estate funds, and 4% strategic initiatives funds. Our available capital increased to a new record high of $52.5 billion, an increase of over 55% year over year. We ended the quarter with $39.3 billion of AUM not yet paying fees, of which approximately $36.3 billion is available for future deployment and, if deployed, corresponds to annual management fees totaling $386 million. With our significant available capital and dry powder, we remain very optimistic on the potential growth prospects ahead of us. Last, our incentive eligible AUM increased by more than $19 billion to $105.6 billion, and of this amount, $41.5 billion was uninvested at quarter end. The third quarter saw continued appreciation of our net accrued performance income balance, which now sits at $322.5 million. This represents a 12% increase from the second quarter and a 37% increase from the lows at the end of the first quarter earlier this year. With record levels of incentive eligible AUM, including more than $40 billion that's uninvested, along with our net accrued performance income, We believe we have the building blocks in place to generate and recognize meaningful long-term value through additional performance fees over time. I'd next like to take a moment to address our robust financial position and capital structure, especially since the beginning of the year. Last quarter, we took advantage of the low interest rate environment by issuing $400 million in 10-year notes at a 3.25% rate, which further increased our flexibility and strength in this market cycle. We ended the quarter with nearly $2 billion in liquidity with $869 million in cash on the balance sheet and no amounts drawn on our $1.065 billion corporate revolving credit facility. Importantly, we have no maturities until 2024 and we have cash in excess of all of our outstanding debt of $226 million. As we previously announced, our outstanding $300 million of 7% perpetual preferred stock is callable as of June 2021, and as this date gets closer, we will reevaluate calling and retiring this equity as it's comparatively expensive, especially compared to our newly issued interest-deductible debt. With substantial liquidity and a strong balance sheet, we are in a compelling position to be more aggressive if and when we see fit going into the final quarter of 2020 and beyond. This gives us the option of further scale in our strategic areas. With continued possible market volatility and election-related uncertainty, we remain very well positioned and capitalized to take advantage of any strategic opportunities that may arise. I'm now going to turn this back to Mike for concluding remarks.

Thanks, Mike. We have long said that Ares is one of those unique and differentiated, quote-unquote, all-weather businesses. It's a business that can perform in various market environments and has outperformed in difficult markets. Our business isn't just demonstrating great durability and resilience in the current market backdrop, but we're also experiencing strong forward momentum. This is most evident from our record financial results and our capital raising success. Our cycle-tested approach, the breadth of our capabilities, and our competitive advantages are all serving us well during these challenging markets. And we see this in our fund-level performance and the differentiated deal flow we originate. I think our capital raising underscores the diversification of our business. We're able to not only grow and scale our comparatively mature businesses like PE and direct lending, but we can now leverage our strengths to scale some of our comparatively more recent businesses like special opportunities and alternative credit. Lastly, our ability to execute on new strategic initiatives, organic and inorganic, is a solid reminder that we're a consolidator in a growing market and that we have multiple avenues for continued long-term growth. As Mike mentioned, we're fortunate to be well capitalized to execute on these exciting growth opportunities. With all that said, I want to conclude by expressing just how impressed and proud I am of the grit and the hard work and the dedication that our team is demonstrating and how grateful I am for all that they're doing to deliver for all of our stakeholders in these challenging times. We also deeply appreciate all of our investors continuing support for our company, and we thank all of you for your time today. And with that, operator, I think we're ready to open up the line for questions.

Thank you. We would like to apologize for the issues we encountered at the beginning of today's call. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Robert Lee with KBW. Please go ahead.

Thanks. Good afternoon, everyone, and thanks for taking my question. Hope everyone's well. I guess, you know, Mike, I'm just kind of curious, you know, I mean, we're hearing that, you know, not just from you, but from some of your peers, you know, that deployment outlook's getting better and, you know, clearly your best performance has been good. But what do you see more broadly, you know, from the competitive universe? I mean, are you seeing signs, maybe particularly in credit, that maybe some competitors are starting to fall away because, you know, they – They were caught more flat-footed by what's happened, and what kind of, if that's the case, what kind of opportunities or not is that creating, whether it's on deployment, acquisition, or greater capture of the LPs?

Sure. There's a lot in there, so I'll try to hit most of it, and then if you have a follow-up, we can drill down. Anytime we go through a crisis of the depth and magnitude like the one that we're going through now, we always see market share consolidation. And as we've talked about in past quarters, there is an overarching secular trend in alternatives for the larger platforms getting larger. And we have long believed that unlike in the liquid markets where size can sometimes hurt performance, in alternatives, at least based on the way that we go about the business, we have found that the larger we get, the more we can invest in competitive advantages and the better our performance is. So I think this crisis is no different in that respect than in past crises. And how we consolidate that share takes many forms. So to your point, we out-deploy because we have scaled capital and flexible capital to pivot as the market develops. And so you'll see that in our deployment in the first nine months of the year where we were much more active in the liquid markets through the first four or five months of the year, pivoted actively into the private markets across the platform through the middle of the year on rescue loans, and now are pivoting yet again into the regular way buyout market as the economy starts to heal and capital comes off the sidelines. So I think in order to succeed through the cycle, The way that we have, you have to be able to play each and every opportunity that gets put in front of you, and you have to have the capital and the people to execute well. So yes, those that went into the crisis with weaker portfolios, weaker balance sheets, less capability, I think are experiencing this crisis much differently than we and some of our larger peers are. I also think that that's showing up in the fundraising. We hear anecdotally that the you know, smaller single asset managers are actually having a very challenging time raising capital in the work from home environment, juxtapose that with us and the larger peers who I think are all enjoying very significant success across multiple products. And then lastly, I think, you know, with regard to deployment picking up, we've often talked with all of you about the three phases of the cycle, one being that first phase where we're the liquid markets were not functioning and we were active playing liquid distress. The second phase being kind of where we are now, which is largely rescue capital opportunities and taking advantage of people's need for liquidity in both what I would call high quality assets with bad balance sheets or high quality balance sheets in decent quality asset pools. And that's been a lot of what we've been doing through the middle of the year. And as I mentioned in the prepared remarks, the deployment was probably slower in Q3 just as a result that the markets were normalizing. And now as we head into the end of the year, I think the combination of people coming off the sidelines with a lot of pent-up demand for deployment, some prospect for economic recovery, albeit uneven, some tax-driven selling on the part of asset owners, And I think of you that low rates are going to support asset prices for a longer time. We are seeing very, very significant pickup and deployment across the platform. And when we get into that phase of the cycle, as we talked about, that's kind of the sweet spot because you still have people who are poorly capitalized. So the distressed opportunity does not go away, but you now have the opportunity to pick and choose between regular way flow for non-COVID impacted assets and companies relative to you know, the more COVID impacted. So we're pretty optimistic about deployment and modernization going into the end of the year and early into 2021. Great. Thanks, Mike. Appreciate it. Thanks, Rob.

Our next question comes from Jerry O'Hara with Jefferies. Please go ahead.

Great, thanks. Perhaps one for Mike McFerrin and just picking up a little bit around that 40% target that you mentioned as it relates to FRA margin over the next three years. Perhaps you could unpack that a little bit, give us maybe a little sense of what gives you confidence of hitting that target, obviously. you know, maybe what could accelerate it or perhaps even, you know, even push it out. But any additional color you could provide around that number would be helpful. Thank you. Sure.

Happy to, Jerry. Yeah, I'll start with, you know, as you know, we don't put forward a lot of forward-looking guidance like that. So while we can't guarantee anything, in the past when we've made outlook statements about where we think the margin would be and others, I think we've have hopefully either consistently met it or under-promised and over-delivered. So I think as far as the risk of it getting pushed back out, I think that's low. Our margin over the last 12 months has expanded 230 basis points, and over the last two years has expanded about 540 basis points. What's going to impact it and the timing of it is really timing of deployment. I mean, when we talk about our AUM not yet earning fees, which means if we continue to grow this quarter with all of our capital raising, when we put that capital to work and the market backdrop for doing so is going to bring those management fees online. Now, Jay, I know you've heard us talk about in the past, it's really the life cycle of our business is the costs related to that capital and are already embedded in the firm today, in our investment teams, our capital raising teams, our non-investment functions. So we are operating with those expenses leading in front of that revenue coming online. And as a result, when that revenue comes online, it comes in at a much higher margin than we operate at. So it really is gonna be a function of that. But when we look at the amount of AUM not yet earning fees, the funds that's related to, and how, frankly, just a continued expense discipline and trajectory of the business, I felt, you know, 40% as a run rate within three years was definitely achievable, and it may happen well sooner.

Great. Thank you for taking the question. Sure.

Our next question comes from Craig Seigenthaler with Credits List. Please go ahead.

Hey, good afternoon, everyone. Hope you're all doing well. Same to you, Craig. I wanted to start with ACOV 5, and I know it's still a young fund, but I wanted your perspective on how the businesses are positioned in doing and also on the performance since inception. Sure. We have Matt and Bennett on.

Why don't we let them handle that?

Great. Fantastic. So this is Matt. It's where I'll start, and Bennett can join in. So ACOF V, to answer the question, we feel very good, very optimistic about the fund. We break it into two parts, one being the non-energy portfolio, and we think we have populated that part of the portfolio with what we call franchise companies, just great companies that are continuing to weather this crisis, and we think have very good long-term opportunities in front of them. So we feel very good about the non-energy portfolio. On the energy side, we've had some challenges this year, but I think we've worked very hard to restructure a lot of the balance sheets of those investments and give those companies and those management teams a lot of time and operating room to make their way into a hopeful recovery of the energy markets over time. When you put those two together, we are still optimistic about ACOF V being a good fund in the long term. I think that does have a little bit of recovery in the energy markets that needs to take place for that to happen. But we feel good about what we've done, what we control, to try and position that energy portfolio for success in the long term.

Thanks, Matt. And just on the energy exposures, are you able to quantify how large that allocation is within the larger ACOP5? And also, are those exposures generally upstream, midstream, or downstream assets?

Sure. So I'll start again taking the second one first. It's primarily in midstream assets. Today, The energy portfolio is about 19% of the remaining value in the ACOF funds overall. And from a Fund 5 perspective, we're probably now on an energy basis closer to sort of 40% on the invested side and less on the fair value side. And so for us, you know, getting that energy portfolio back towards, you know, making back our money in that portfolio and beyond is sort of what our goal and our hope is.

Great. Thank you, Matt. Thanks, Greg.

Our next question comes from Ken Worthington with JP Morgan. Please go ahead.

Hi, good morning and afternoon, depending on where you are. Maybe just some questions about the insurance business. Is the competitiveness of the insurance market business for alternative managers rising? We did see some competition for AEL recently. I'm not sure if that's a one-off or are you seeing more of that? And whether the deal for F&G was competitive or not, Could you highlight maybe the factors beyond price that influenced Ares' sort of win of that deal? Thank you.

Sure. So I would characterize it as competitive but organized competition in the sense that Ares and those that look like us are all seeing the same long-term trend, which is The insurance market is struggling with low interest rates for longer and long duration liabilities with the inability to generate asset returns to meet the needs of that portfolio. So if you just think about the evolution of that dynamic, not surprisingly, prior to folks like us aligning more strategically with insurance company platforms, we were managing and continue to manage a significant amount of capital on behalf of insurance company clients because the name of the game is to transition being just a liability-oriented manager and start to figure out how you can actually generate differentiated asset performance and excess return. And I expect that that trend is here to stay, will continue, and will accelerate. It is a very large market. I think there's plenty of room for all of us to continue to build our insurance businesses alongside our core business. But what I would comment on is actually expanding the playing field, if you will, for what it means to be an alternative fixed income manager. So a lot of the product that makes sense for the insurance company clients or the captive insurers is higher up the balance sheet, you know, what I would call fixed income insurance. fixed income alternatives or high-grade fixed income alternatives as opposed to some of the historically traditional private credit assets. So in many respects, it's expanded the opportunity set for folks like us. And the competition, like I said, it's consistent. So those of us who have a commitment to building the insurance business are building it. But we have not seen a lot of new entrants coming in because, again, I think you need differentiated sourcing at scale, right, and you need the access to the capital. And so I think the people who are in the market are the ones that are going to continue to scale. Great. Thank you very much.

Our next question comes from Mike Carrier with Bank of America. Please go ahead.

Afternoon. Thanks for taking the questions. So overall, investment performance has been strong for you guys, but the longer COVID is around, it tends to have more of an impact on some of the smaller and the middle market companies. So just given your skill in that part of the market, what are you seeing in terms of areas of challenges or possible opportunities? And have prices gotten cheap enough to shift into some areas that you guys have avoided thus far through the cycle?

Yeah, so I'm glad you bring up middle market kind of as a concept to think about how the crisis is playing out because Ares is squarely a middle market firm, but the definition of middle market obviously continues to expand. There's probably no better place to look than ARCC and some of the comments that Kip and the team made yesterday around average issuer size now in excess of $100 million of EBITDA and some of the return opportunities that we're seeing there relative to smaller companies. So I believe Smaller companies obviously have fewer levers to pull in navigating the crisis. They have less consistent access to liquidity, maybe less durable business models or less institutional quality opportunities for exit, and so we would expect to see more stress in the lower end of the market than the upper end. I think, fortunately, most of our deployment is in the upper end of the market, and so you can see how that's benefited performance of the in-place book. As we continue to get more clarity around the forward earnings picture, yes, there should be an opportunity for us, whether it's through our special opportunities business, alternative credit, or direct lending to go in and be a liquidity provider to those companies and those asset owners. I will tell you right now, that's not where we're seeing the best relative value because we're putting money to work actually at higher rates of return and higher quality assets given the capital inefficiency. There's just a lot of people who can write a check into a smaller company situation relative to people who have our capital scale. And that's actually creating a little bit of a perversion in terms of the risk-adjusted return opportunity down market. But if history is any indicator, clearly that should present itself to us, both in terms of buying portfolios, but also coming in with rescue loans to individual assets and individual companies.

Got it. Okay. Thanks. And then just on your question, some of the strategic moves that you guys have made, you know, to position areas for growth opportunities in Asia. I know it's still early on some of the moves that you made, but just wanted to see, you know, how it has been in early days in terms of the progress, particularly, you know, given that at least from like the COVID standpoint, you know, some things seem in some of those markets to be, you know, kind of further along or more past.

Yeah, it's interesting. One of the reasons why we wanted to build out in Asia, as we've talked about, is clearly that's where a significant amount of global GDP growth is going to come over the next 20 years. But we also want to have a window into other parts of the world as, you know, despite the current administration's view, as the economy globalizes, we want to be global. It is an interesting juxtaposition because, you know, those economies are you know, at a different phase in terms of the recovery. And so their opportunity set is developing along a slightly different trajectory. But as I mentioned earlier, our Asian vehicles have the ability to invest flexibly through the cycle the same way that our European and U.S. do. So similar to the path that we've been on where they were active in the liquid markets earlier in the crisis and now we're starting to pivot, you know, more towards regular way investing, they're mirroring that. Deployment has been very strong, particularly in our special situation strategies there. And as I mentioned, we're in the market now fundraising for our third senior direct lending fund. And, you know, that's already, as I mentioned, close to a billion dollars on a $1.2 billion cover having been launched in COVID. So, you know, so far so good. Obviously it's early, but the value proposition that we underwrote both in terms of scale and window into the world and, you know, return generation is all playing out as we hope.

Great. All right. Next slide.

Our next question comes from Alex Blisstein with Goldman Sachs. Please go ahead.

Great. Hello, everybody. Mike, I wanted to ask you about M&A broadly, both as a buyer, but also maybe as a seller. There's obviously been a lot more speculation, much more in the traditional set of the world, but the alternatives is where the growth is, and we're obviously seeing some firms comment on that as well. How do you guys think about the momentum you're having in the business today relative to an opportunity either as a buyer to partner with somebody for distribution or the other way around if somebody could plug you into their distribution and accelerate growth that way? I know a little bit of a bigger picture, but curious to get your thoughts on that.

Sure. It's a great question. We've, I think, been pretty... transparent that we believe that there is a long-term, and I would emphasize long-term trend of convergence in asset management between retail and institutional, as well as traditional and alternative. And so, you know, if I look forward 10 plus years, I think those lines will continue to blur as these business models continue to evolve and move towards scale. I think the challenge we have, candidly, is when you look at the fundamentals in our business, we've been growing 15% to 25% per year across every functional area and every financial metric. We have secular tailwinds in terms of the appetite for our assets. The structure of our business doesn't have the mark-to-market volatility, the risk of outflows, or the risk of fee compression that you see in the traditional space. and so on and so forth. So it's hard, frankly, for us to want to lead into that convergence trend because we have such wind at our back continuing to execute on our playbook in alternatives that to divert our attention towards, you know, business models that are struggling for growth, struggling for margin expansion, struggling for performance. It's hard to, you know, see the industrial logic in that, but we do have an eye on what is a long-term vision for the future where there will be great asset managers and not great asset managers globally, and I think we have to be open to new definitions of what it means to be alternative or what it means to be traditional. In the meantime, as you've seen, we will continue to be active on the acquisition front where we can add new capability, new distribution, you know, new geographies that we think will accelerate our growth into the favorable backdrop. As we've talked about before, though, the bar for acquisitions is getting higher because as we've demonstrated with things like special opportunities or alternative credit, we're now at a size and capability where we can bring teams onto the platform, surround them with capital and structure, and actually grow pretty sizable businesses organically and in a way that's just much more accretive to long-term value creation than buying. So while we look at all things, the bar, while it's always been high, I think is getting higher just given our ability to organically grow some of these step-out strategies.

Great. Great. Makes sense. Agreed with all that. Clean up question for the other mic. On the new segments, the strategic initiative segment, the way you guys break it out, can you help us think through sort of the growth path there on the asset and fee side and also the incremental margins there? Because from the segment reporting, it looks like the margin is obviously quite high in that part of the business. Just curious about sort of sustainability of that margin and how that sort of translates with more fees and AUM coming into that part of the model over time.

Yeah, look, that's going to be, again, a growing area. And I mentioned in my prepared remarks, you know, Ares SSG is in there. Aspita is going to be in there. So I think it would be challenging to try and focus too much on the margin of that business because that business is going to have different things going into it. And as segments evolve and grow, Some things we'll probably expect over time will grow out of that segment and become their own segments in the future. So I know you're looking for some modeling direction on it. That's, I think, challenging. What I would say is, by the way, when you look at the margin, I would highlight that we're reporting that segment consistent with our others. So a portion of the costs that relate to what we would call more corporate activities of themes of that segment are in the operations management group segment. So I think that's in the appendix of our earnings presentation. So you'll see some of that there. So this is definitely an apples to apples comparison to our other business model. But I think once, after we have F&G reclosed, it'll be a little easier to look at it with a couple themes in it, and you'll start to see more of a run rate around it.

Awesome, great. Thanks very much again.

Sure. Thanks.

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

Thanks, guys. Another question on the insurance business. Look, I know it's very, very early days for you guys here, and you highlighted, you know, how big the market opportunity is. But we just step back and look at the environment. I mean, interest rates are just so low. Do you think this business can still be an organic grower? with interest rates where they are, or for now, will growth in this business be more about M&A opportunities?

Yeah, I think it's both. We've talked about before, one of the benefits of our approach is that we have not been encumbered by any large legacy balance sheet exposures in the way that we're approaching the build of our insurance platform. So I think if we were sitting on a large legacy book and we had to deal with the enforced liabilities in this rate environment, we may feel differently. But here's what we know. With low rates, everybody is going to be struggling to generate the asset returns that they need to support their actuarial models. And that's true whether you're a pension fund or an insurance company or an individual. low rates in and of themselves I think are going to continue to drive people to, you know, need to think about savings but think about how they generate return through the retirement. So I think the whole retirement market, you know, annuities at the top of the list is going to continue to grow. At the end of the day, the way that we and others are approaching this business is it's a spread lending business. And so as long as we can continue to use our differentiated origination and structuring to generate excess spread, then it will continue to be a growth vehicle for us. And I'm pretty confident that's the world that we're going to be living in.

Okay. Thanks a lot.

Our next question comes from Adam Beattie with UBS. Please go ahead.

Hi. Thank you for taking my question. In the commentary, you highlighted a cross-asset deal involving real estate, and just wanted to get a sense of, you know, to broaden that out, how much, how many of those types of opportunities that you're seeing and or generating, perhaps in real estate or perhaps otherwise, and how you feel you're competitively positioned for deals like that. Thank you.

Sure. So those who have known us a long time, Adam, have always heard us talk about what we call the power of the platform and collaborative culture. And I know a lot of people talk about similar approaches. I actually think that it's harder to execute on than many people appreciate. I think, you know, many businesses that look like ours that didn't grow up with the sense of partnership and collaboration that we have can get siloed and not have aligned incentives. And that can create, you know, some constraints to the type of active collaboration that we're you know, we were highlighting in the prepared remarks, that is core to who we are and how we invest in any environment. So as an example, if you harken back a couple quarters, when we did a Unitranche for a company called Ardona, which was the largest European Unitranche ever recorded at close to $2 billion, that was actually done as a collaboration between our U.S. direct lending team and our European direct lending team. So that's a regular part of the business. And the reason that that happens is a lot of these situations are going to force, they're forcing mechanisms for these teams to come together. Either there's a need for capital scale or it's a hybrid, you know, a net lease transaction where you want to bring credit expertise together with real estate expertise. Or in the case of this Unitron, you have a U.S. sponsor looking at a European asset. So the market is kind of pushing us into that act of collaboration. When you get into a crisis like the one we're in now, all of those catalysts for collaboration just get amplified because there's so many unique situations that have structural challenges in them where if we can bring capital scale, capital flexibility, unique information, insights, relationships, et cetera, it's better for everybody. So I would say now more than ever, we're collaborating now more than we ever have, but it's not unique just to being in the middle of a crisis. It's core to how we manage the business and core to the culture in terms of how people think about partnership here.

Great, that's really clear. Thank you, Mike.

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

Hey, good afternoon. Thanks for taking the question. I was just hoping you guys could dive in a bit more on the organic initiatives, in particular newer organic initiatives, the ones you're most excited about there. Special Sits, I imagine that's one of them. You guys have raised some capital there. I guess what are some of the others that may be on the cusp of raising capital where you've hired folks, where you've been building out teams? Which ones could be raising capital in the next year or two? How are you thinking about extending out into additional adjacencies from here?

Yeah, so I don't want to give away some trade secrets here. So I'll just highlight, in our prepared remarks, we talked about funds that are kind of in the queue over the next 12 months that we think will generate $25 billion plus of incremental equity capital commitments in excess of what we had raised through the end of the quarter. Embedded in that are a number of step-out strategies, and those are going to be in adjacent markets. So, for example, leveraging our direct lending expertise into specific industries. You know, it may be leveraging our healthcare expertise in private equity into other, you know, parts of the healthcare market and ecosystem. So, I don't want to be evasive, but there's so many interesting things that we're incubating. I'd rather wait till their birth than we have something to talk about and then, you know, happy to drill down on it. But What you're highlighting is key to how we're driving the type of growth rate that we are, and special opportunities is a great example. Alternative credit is another one where, obviously, we've been able to grow that asset base by 50% over the last year and a half organically by bringing new folks and new capital solutions onto the platform. So we have a number of those types of situations that are very far along, and I think over the next couple of quarters you'll get some good exposure to what those are.

Okay, maybe I could just ask a follow-up on your infrastructure investing business. I was just hoping you can kind of give an update there on how that looks today. What are some of the opportunities that you're seeing, not just on the deployment front, but also just from further scaling and growing that platform? And what might the opportunity set be if we get a blue wave here that maybe has an infrastructure spending bill? How might that change or catalyze any sort of growth?

Yeah, so we are in the market, as we mentioned, and we had a first close in the quarter on our infrastructure strategy, which has now been, for the most part, fully repositioned into what we call climate infrastructure. And that team, both on the credit and equity side, is now 100% focused on investing money into the energy transition, and that's both renewable energy infrastructure, sustainable infrastructure, and renewable technology. That is where the market is going. That is where the opportunity for investment will be. It's also consistent with where we stand from an ESG-focused standpoint and I think where our investors stand as well. The deployment there has been very exciting, and it ranges the entire waterfront of the energy transition from renewable power generation to technology around vehicle electrification, battery storage, residential solar, and things like that. So it really runs the gamut. The current administration has actually been you know, favorable for renewables, despite the fact that I think that folks probably feel like they're more heavily supportive of the fossil fuel industry. We've actually seen the business thrive just because there's so much happening at the state and local level and at the consumer preference level that's kind of pulling that change through as well. But, yeah, if we have a blue wave and a big renewable energy infrastructure bill, that's going to, you know, unlock a pretty significant opportunity set for us. In terms of where it could go, obviously the range of what I would call sustainable infrastructure is broader than just wind and solar, so I think you would see us continue to broaden out there. And then geographically, right now we've been limiting our investment in the U.S. market, but I would expect to see us continue to look to other geographies as that business expands as well.

Great. Thank you.

Our next question comes from Jeremy Campbell with Barclays. Please go ahead.

Hey, thanks. A lot of high-levels got asked already, so maybe just a quick spotlight on expenses for Mike McFerrin. First, thanks for that color on FRE margins over time. So this might be a little more around clean-up near-term geography of cost, but looks like corporate expenses went up about $8 million quarter-over-quarter. You know, since you guys bought up your stake in a pretty wholly-formed business – Wondering if that lift was from corporate-type costs from SSG majority stake that didn't really flow into the segment, or if there was something else going on here.

Good question. I'd say about $2 million of G&A this quarter was related to that. So I think I had said last quarter I kind of thought G&A would probably be prior to including SSG in the low 40s. Okay. but back two million off, it's 41.8. This quarter we did have some non-recurring expenses related to some of the capital raising. As you can appreciate, when you're raising a lot of money, timing of just expenses related to work around that, including a lot of professional fees and structuring costs, will be a little more volatile. But G&A to me felt a little elevated this quarter, again, a function of just adding SSG and just all the capital raising. Got it. But good reason for it, frankly.

Yeah, exactly. And then, you know, as we look ahead to the FG reclose, is there going to be any lift on the corporate side there too, or is that going to flow mostly through this segment?

It's going to flow through the segment.

Perfect. Thanks a lot. Sure.

Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Mike Garagetti for any closing remarks.

No, we appreciate everybody spending time with us. We hope everybody stays safe and well, and we look forward to speaking with everybody next quarter. And I also do want to congratulate my L.A. colleagues on the Dodger win to the disgruntled Yankees fan. Tough to see, but in the spirit of partnership, I'm happy for all of you. So congratulations, and we'll talk to everybody next quarter. Thanks.

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 November 25th, 2020 by dialing 877-344-7529 into international callers by dialing 1-412-317-0088 for all replays. please reference conference number 10147946. An archived replay will also be available on a webcast link located on the homepage of the investor resources section of our website.