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?