Ares Management Corporation

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 27, 2021. I will now turn the call over to Carl Drake, Head of Public Company Investor Relations for Ares Management.

Good afternoon, and thank you for joining us today for our Third Quarter 2021 Conference Call. I am joined today by Michael Arrighetti, our Chief Executive Officer, and Jared Phillips, our Chief Financial Officer. We also have a number of executives with us today who will be available during Q&A. 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 in isolation from or a substitute for measures prepared in accordance with generally accepted accounting principles. 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 GAAP 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 47 cents per share, which is consistent with our prior quarter dividend and represents an increase of 17.5% over our prior year's quarterly dividend. The dividend will be paid on December 31st, 2021 to holders of record on December 17th. Now I'll turn the call over to Michael Arrighetti, We will start with some quarterly financial and business highlights.

Great. Thank you, Carl, and good afternoon, everyone. I hope you're all doing well. At our recent investor day in August, we highlighted that our growth strategy is supported by a number of key themes. We operate in very large and growing total addressable markets with meaningful competitive advantages. Retail and institutional investors around the globe continue to increase allocations to private market alternatives, and we've expanded our product offering and distribution to meet this strong demand. In addition, we're a consolidator in our market, and our recent acquisitions have provided us with new growth engines and capabilities that further enhance our potential. As you can see from our earnings report this morning, we executed well on our corporate objectives during the third quarter with strong results across the platform in fundraising, investing, and fund performance. I'll start with a few third quarter highlights and a business update. We generated particularly strong Q3 growth in our AUM and management fees, both of which were up over 50% on a year-over-year basis. We raised a record $51.6 billion year-to-date as we continue to tap into investor demand for private market solutions. We also once again demonstrated the benefits of our deep teams and broad market coverage across our investment strategies with record deployment of nearly $20 billion. Our rapid top-line growth combined with the economies of scale that we drive through operating leverage translated into more than 70% year-over-year FRE growth and another FRE margin record of 39%. Adding in our monetization activity, our realized income grew 36 percent year over year, with a contribution from our core fee-related earnings over 90 percent. Strong fund performance has also led to a new record level in net accrued performance income, which more than doubled over the past year. Based on our business prospects, market position, and the secular tailwinds in our industry, we're excited about the growth prospects for our business. Let me update you on our two most recent strategic acquisitions that were both fully incorporated into our third quarter's results, Landmark Partners and Black Creek Group. At our investor day, we outlined a playbook for building businesses that centered on leveraging the scale of and the collaboration across the ARIES platform to enhance value creation, capture revenue synergies, and expand products and distribution. We're in the very early innings of executing our playbook with both of these acquisitions, and we believe that the two acquisitions collectively were already modestly financially accretive to our after-tax realized income per Class A common share during the third quarter. We expect them to be more accretive going forward as we execute on our playbook of identified strategic and financial synergies. The Landmark acquisition, which gave us a large foothold in the growing secondary market for private alternatives, is already yielding some exciting results after closing on June 2nd. In the third quarter, Landmark raised over $1 billion, launched its ninth real estate fund, and is now exploring other product extensions and distribution channels. On July 1st, we closed our acquisition of the Black Creek Group, which had approximately $13.7 billion of AUM at closing, and it finished the third quarter with $15 billion of AUM. As previously discussed, our Black Creek acquisition is highly strategic and provides a number of important synergies across our fundraising and investing activities. Black Creek adds core and core plus real estate products, which now enable us to offer a full suite of investment products within our real estate group, including debt, core, core plus, value add, and opportunistic investment strategies. Black Creek also brings a best in class vertically integrated skill set in industrial logistics, a fast growing segment of the real estate market. In addition to enhancing our product offerings, Black Creek also has one of the largest retail alternative investment fundraising platforms in the country. The Black Creek non-traded REITs and institutional open-ended industrial fund had a great start under Ari's ownership with nearly $800 million of new equity capital raised in Q3, along with strong quarterly fund performance. A key goal for us is to expand our retail distribution onto new broker-dealer platforms over time and to meaningfully accelerate the pace of our retail and high net worth fundraising in the years ahead. On that note, We recently announced the formation of Aries Wealth Management Solutions, which combines our high net worth fundraising capabilities with Black Creek's powerful retail distribution under one umbrella. Led by Raj Danda, our global head of wealth management, Aries Wealth Management Solutions will oversee the distribution of Aries investment products in the global wealth management channel. With more than 90 professionals and growing, we believe that Aries Wealth Management Solutions is one of the largest retail distribution platforms owned by any alternative manager. Our retail channel now represents nearly $50 billion in AUM, and we expect it to be among our fastest growth areas over the next five years. The efforts that we've made over the past several years to diversify and scale our product suite are driving meaningful growth in our fundraising. During the third quarter, we raised more than $20 billion in new capital for the second consecutive quarter, including more than $15 billion directly from existing institutional investors. By comparison, our nearly $52 billion in funds raised year-to-date already exceeds our record of $41 billion last year. Our Q3 fundraising was broad-based across our investment groups and included a particularly sharp increase in our perpetual capital. which accounted for more than $7 billion of the third quarter total. Our perpetual capital vehicles, which include our public vehicles, such as Aries Capital Corporation, Aries Commercial Real Estate, Aries Dynamic Credit Allocation Fund, our non-traded REITs, our Diversified Credit Interval Fund, our Aspita Insurance Platform, open-end commingled funds, and a significant number of Evergreen-style strategic managed accounts, were up 73% over the past year. We also raised $10 billion in long-dated institutional commingled funds during the quarter. We're clearly benefiting from our strong investment performance, broad offering across a growing and diverse set of clients, and the demand for alternative investments from existing and new investors. Within our credit group, we raised $800 million in the quarter, and we held a final close of $1.1 billion post-quarter end for our second U.S. Junior Capital Direct Lending Fund, PCS2, bringing total fund commitments to $5.1 billion. Benefiting from the strong performance of its predecessor fund, PCS2 exceeded its $4 billion target and PCS1's size of $3.4 billion. In the final closing, we saw very strong participation from existing investors who contributed approximately 90% of the capital, including PCS1 investors who re-upped by 140% on average, along with existing ARIES investors from elsewhere on the platform who invested in the strategy for the first time. We also brought in 22 new investors to ARIES. We continue to enjoy strong demand for our U.S. Senior Direct Lending Flagship Fund with another $1.7 billion in equity commitments and $2.8 billion in debt commitments in the third quarter, bringing total fund capital raised to nearly $9.5 billion. We also added additional closings to our inaugural Sports, Media, and Entertainment Fund of about $270 million, bringing total commitments to nearly $850 million. As discussed on last quarter's call, we held our first closing of $1.6 billion in our new open-end core alternative credit fund in July, which employs an asset-focused income strategy in an evergreen format. The fund is expected to reopen for new investors next year. We also launched a new open-end global multi-asset credit fund within our liquid credit group, which is off to a good start with more than $350 million raised during the third and fourth quarters. In our private equity group, we had a final close of approximately $1.5 billion in ACOF VI, bringing total commitments to $5.7 billion. ACOF VI is off to a strong start with nearly 50% of the fund's capital already invested or committed in a diversified portfolio across its four core industries of healthcare, services and technology, consumer and retail, and industrial. We recently launched our second Special Opportunities Fund, and we just held a first close of approximately $3 billion this week. In this first close, we're excited that we'll reach three-quarters of our targeted fundraise with over 45 investors and great support from existing and new investors. And our investors have given us the ability to upsize the fund. Given the capital raised in this first close, we expect our second Special Opportunities Fund will be well in excess of the predecessor fund, ASOF I, of $3.5 billion. So altogether, over the past two years, the private equity group has seen significant fundraising activity with over $13 billion raised across its funds, including the second Special Opportunities Fund commitments. In real estate, We held the final close for our third European value-add real estate fund, EPEP III, totaling €1.5 billion, which exceeded the fund's initial target of €1 billion. Including co-investments, the fund raised nearly €2 billion of equity for deployment. We believe that EPEP III represents one of the largest closed-end value-add real estate funds in Europe today. The fund has already deployed €500 million of equity across six properties to date. And finally, we raised nearly $500 million in debt and equity commitments in our two institutional open-ended real estate income funds, bringing total AUM in those two funds to a combined $4.3 billion. In strategic initiatives, Aspita raised nearly $500 million of AUM in the quarter, and over 60% of the new capital is sub-advised by ARIES. Aspita currently has $3.2 billion of total AUM, with approximately 35 percent sub-advised by ARIES. We believe that we now have the infrastructure in place to begin scaling this platform meaningfully in the years ahead. And within ARIES SSG, following the final close of our Secured Lending Opportunities Fund 3, which brought total fund commitments to $1.6 billion, which was nearly double the size of its predecessor fund, we launched our sixth flagship Asian Special SITS fund and expect an initial close in the fourth quarter. Going forward, we have a dozen commingled funds targeting a $1 billion or more size currently in the market or soon to be launched, and we have another nine institutional open-end and retail continuous offer funds in the market with $1 billion or more in AUM. When combining these fund offerings with the strong momentum in new large institutional SMAs, we expect continued strong fundraising over the next 12 months. Also, as discussed at our investor day, we have an active pipeline of new funds and development across the platform. Turning toward deployment, as we discussed at our investor day, the scaling of our investment teams is meaningfully increasing investment activity and efficiency per investment professional. During the third quarter, we invested nearly $20 billion of gross capital with approximately $11 billion in our drawdown funds versus $8.1 billion in the second quarter. We were very active deploying private credit across North America, Europe, and Asia as transaction demand remains robust, particularly as larger companies increasingly tap into this market. This strong pipeline is continuing into the fourth quarter. During the third quarter, we were also particularly active investing in some of our favorite sectors, including industrial and logistics in real estate, and a broad set of healthcare investments across our credit and private equity portfolios. We also continue to find attractive opportunities in the growing renewable energy sector, an area where we've been actively investing since 2015 with more than $3.5 billion in commitments. A great example of this is our pending acquisition of Apex Clean Energy, one of the largest developers of renewable energy in the United States. Our fund performance remains consistently strong across the platform as well. Notable highlights in the quarter include an impressive 19.4% quarterly gross return in our U.S. real estate equity fund composite, which brings 12-month performance to 60%. Our non-traded industrial REIT also generated strong gross returns of 10.5% in the quarter and more than 20% over the last 12 months. These funds are experiencing strong momentum from rent growth and supply constraints in the industrial sector. In private equity, special opportunities and corporate private equity had another strong third quarter, up 10.7% and 5.8%. with 12-month gross returns of 60% and 54%, respectively. In our secondaries business, our private equity and real estate funds were up 12.9% and 11.1%, respectively, on a one-quarter lag basis. And over the past 12 months, the funds were up 49.2% and 27.2%, respectively. And within U.S. and European direct lending, Aries Capital Corporation generated a 4.2% net return in the quarter and 23.1% over the past 12 months, while European Direct Lending increased 3.6% in the quarter and 14.6% on a 12-month basis. And now I'll turn the call over to Jared for his remarks on our business positioning and our financial results. Jared?