Ares Management Corporation

Hello and welcome to 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 Thursday, the 28th of July, 2022. I'll now turn the call over to Carl Drake, Head of Public Market Investor Relations, to begin. Carl, over to you.

Good afternoon and thank you for joining us today for our second quarter conference call. I'm 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 and 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 as a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our second 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 ARIES fund. This morning we announced that we declared our third quarter common dividend of 61 cents per share of our Class A and non-voting common stock, representing an increase of 30% over our dividend for the same quarter a year ago. The dividend will be paid on September 30th to holders of record on September 16th. Now we'll turn the call over to Michael Arrighetti, who will start with some quarterly financial and business highlights.

Thank you, Carl, and good afternoon. I hope everyone is doing well. Despite prevailing market volatility and economic uncertainty, our second quarter results demonstrate the resiliency and durability of our business, highlighted by strong growth across our AUM and fee-related earnings, as well as our ability to generate attractive fund performance for our investors. We raised $16.4 billion of new gross commitments, driving our AUM to $334 billion, up 35% year-over-year, and our fee-paying AUM was up 37% year-over-year. Our management fees continued their steady growth up 41% year-over-year, and our fee-related earnings growth was even better, increasing almost 50% as we continued to gain operating efficiencies from our strong top-line momentum. Our continued growth was driven primarily by our opportunistic and diverse investing activities, often taking advantage of the retrenchment of the banks and the public markets to provide solutions to high-quality companies and asset owners. Our firm is structured to navigate volatile markets as we've built large direct sourcing networks coupled with flexible strategies that are able to invest across asset classes, geographies, and markets. As we mentioned on previous calls, 2022 is a year where we're investing in our front and back office platforms in advance of our expected growth in the years to come. Yet, despite adding 200 professionals in the first half of 2022 and continuing to invest in systems and infrastructure to support future growth, our FRE margins expanded to a record 40.1% in the quarter. We recognize that investors and analysts have been concerned about the impact on alternative managers from the more challenging market and economic conditions marked by high inflation, rising interest rates, and a possible recession. We believe that our business and portfolios are well positioned to navigate these types of risks. In fact, we have a track record of accelerated growth during past periods of economic recession and market volatility. For example, we increased both our AUM and management fees at a compound annual growth rate of more than 25% during both the global financial crisis of 2007 to 2009 and the volatility introduced by the COVID pandemic from 2019 to 2021. Our goal at ARIES is to perform for our investors throughout market cycles and to be able to invest opportunistically and flexibly when other market participants won't or can't. To accomplish this, we've built our business to withstand market volatility across our AUM, our revenue mix, and the composition of our balance sheet. Approximately 64% of our invested assets are in credit investments, which provide protection from losses or declines in valuation multiples during economic downturns by generally being in the top half of the capital structures of our portfolio investments. While every cycle is different, I would note that the direct lending asset class outperformed other credit investments such as high yield bonds, syndicated bank loans, and investment grade bonds during the past two full cycles, encompassing the Fed tightening, recession, and recovery. Our credit portfolio also provides meaningful benefits to both our fund investors and ARIs during rising interest rate environments, as roughly 90% of our credit group debt assets are in floating rate instruments. We would expect this to drive higher ARCC Part 1 and other credit-based incentive fees in the second half of this year. In fact, ARCC reported on Tuesday that a full run rate earnings impact from the recent increase in base interest rates through the end of the second quarter could have increased its second quarter score earnings by about 11% and that an additional 100 basis point increase in base rates from June 30th could add a 17% increase of second quarter core earnings, all else held equal. As you know, ARIES management would see a corresponding increase in its ARCC Part 1 fees. Across the rest of our asset mix, we believe that our growing AUM in real assets, such as real estate and infrastructure, will also provide meaningful inflation protection due to the built-in inflation escalators generally incorporated in these assets. Our private equity business is also differentiated with its focus on resilient industries and flexible capital deployment across debt, equity, and even distressed assets, which may protect our downside through dislocated markets. I would also note that the structure of our AUM in long-dated and perpetual vehicles also provides insulation. About 88% of our AUM and 95% of our management fees are from either long-dated funds or perpetual capital vehicles. Due to the long-term nature of this capital, we have not experienced significant redemption issues during volatile periods. This has enabled us to be patient investors and utilize the capabilities of our experienced teams to support portfolio companies during challenging times. Having significant dry powder and access to capital is also critical to success. At quarter end, we're well positioned with over $90 billion of available capital, of which $52.7 billion is not yet generating management fees and available to support further FRE growth when deployed. Combining our significant dry powder with the flexible investment mandates of many of our funds, we expect to take further advantage of increasingly attractive opportunities that we believe will arise in the coming quarters as the competitive landscape potentially improves. We believe that our management fee-centric model also provides greater stability to our realized income compared to more performance fee-based and balance sheet heavy business models. In the first half of 2022, 91% of our RI is derived from our fee-related earnings, and this stability in our earnings has been steadily increasing over the past three years. We have also consistently generated 83% or more of total fee revenues from our management fees. A final component of our model is our asset-light balance sheet, where investments represent less than 0.5% of our total AUM. This means that we're less susceptible to changes in market values for risk assets. Putting this all together, we believe that ARIES is well-positioned to continue its strong growth with our fee-related earnings and our common stock dividends increasing at least 20% per annum through 2025. From a fundraising perspective, there's been a lot of discussion about the more difficult institutional fundraising environment caused by the denominator effect, as the value of public equity and fixed income portfolios have traded off substantially. We have not seen this impact in our fundraising to date, and we feel very good about our future fundraising pipeline. During the second quarter, we continue to see strong demand across our investment groups, raising $16.4 billion of gross commitments across more than 15 different funds and numerous SMAs, including more than $5 billion of capital raised in our perpetual capital vehicles. As we look forward, in addition to our ongoing fundraising activities, we expect to begin another commingled flagship fundraising cycle with four of our largest fund complexes launching successor funds in the second half of this year, targeting first closings in 2023. This includes our seventh corporate private equity fund, our sixth European direct lending fund, our second flagship closed-end alternative credit fund, and our third U.S. junior capital direct lending fund. We also expect to follow up with our third U.S. senior direct lending fund next year. We continued our momentum with retail investors in the second quarter, raising over $1.6 billion in the retail channel. Our retail channel AUM now stands at $57 billion in June 30. With respect to AREA's wealth management solutions, we continue to expand in a variety of ways as we see a significant opportunity to gain share in what we believe is a multi-trillion dollar market opportunity just in the next several years. As a global leader in credit and real assets, we believe that we're uniquely positioned to gain share with high net worth investors through our growing suite of income generating, less volatile non-traded alternative investment products. We've added a senior leader in Asia Pacific, and we will be adding a senior leader in Europe shortly, both of whom are focused on helping us expand our retail distribution globally. We're also adding additional resources to our 108 professionals globally, expanding new products and increasing our distribution channels. We continue to make progress with our distribution here in the US market, and we expect to add one or more new wire houses for our non-traded redistribution in the second half of the year. And on the new product front, we launched a new secondary private markets fund with more than $250 million of capital during the second quarter, and we remain on file with a new non-traded BDC. Our deployment activity in the second quarter highlights the power of the size, diversity, and scale of the platform that we've built over the past several decades. Although private credit and private equity market volumes were generally slower in the second quarter, we had our second largest deployment quarter to date as we stepped in to gain share in these large addressable markets. We invested $24.1 billion in the quarter, well ahead of the $16.3 billion that we deployed in the first quarter of the year. We saw strong deployment across our U.S. and European direct lending businesses, totaling $7.7 billion and $3.8 billion respectively. as we focused on the expansion needs of our incumbent relationships and larger, higher quality companies which sought access to private capital while banks retrenched and the capital markets were largely closed. We believe that this compelling environment could continue for some time as many banks and traditional capital providers are generally risk averse during dislocated markets. In private equity, our special opportunity strategy was very active deploying $1.7 billion in the quarter as the market environment opened up new opportunities. Of note, our ASOP team has one of the largest investment pipelines that they've seen to date, finding new opportunities in the liquid secondary market, as well as a large pipeline of private opportunities in companies seeking creative capital solutions. Our alternative credit business, which also invests opportunistically in diversified portfolios of cash-flowing assets, also deployed $1.7 billion, taking advantage of increased demand for private capital across their target sectors due to a pullback from traditional capital providers. Our real assets group deployed over $5 billion of capital, including over $2 billion across our non-traded REITs and $2 billion in our other real estate funds, largely maintaining our focus on industrial and multifamily assets. Our newly acquired infrastructure debt business was also active, investing nearly $750 million of capital in the quarter. We invested over $800 million through our secondary solution strategy. Interestingly, some of the denominator effect issues I referenced earlier are creating an increased need for portfolio management among private asset owners, which we expect to contribute to an acceleration of secondary transactions. In terms of fund performance, Results remained generally strong in the second quarter as cash flow growth trends continued, and we didn't see meaningful signs of fundamental weakness in our portfolios. The standout performers for us in the quarter were our U.S. real estate equity strategy, which generated gross returns in the second quarter and last 12 months of 5.1% and 54.9%, and our European real estate equity strategy, which generated gross returns in the second quarter and last 12 months of 5.3%, and 20.3%. Our non-traded REITs also continue to generate strong income and returns with second quarter net returns for AI REIT of 6.3% and 3.1% for A REIT. Our U.S. and European real estate portfolios continue to benefit from the overweighting of the best performing industrial and multifamily sectors with significant underweight in office, retail, and hospitality. Of note, our $7.6 billion Aerie Industrial REIT, which is a good proxy for our U.S. industrial assets, saw rent gains on new and renewal leases up 42% on average in the second quarter, and the portfolio was 99.5% leased at quarter end, illustrating the strong demand in the industrial real estate market. In Aerie, our multifamily portfolio generated rent increases on new leases of 21%, and on renewing leases, 18% during the second quarter. We are seeing cap rates moving higher, albeit unevenly across real estate property types, but portfolio cash flow growth remains a strong offset in our target markets. Within our significant funds and credit, our direct lending credit strategies continue to outperform liquid market alternatives. Aerie's Capital Corporation generated a net return of 1.2% in the second quarter and 13.4% for the last 12 months. Similarly, our two largest direct lending strategy composites in the US and Europe also had steady returns. Our US senior direct lending strategy had a gross return of 2.3% for the second quarter and 15.5% for the last 12 months. And our European direct lending strategy generated gross returns of 2.6% for the quarter and 11.3% for the last 12 months. Our performance benefited from our floating rate portfolios, strong EBITDA growth, and our credit selection in larger companies with a focus on defensive industries. Our private equity returns were also steady, driven by strong EBITDA growth in the second quarter, partially offset by lower equity multiples. Our corporate private equity composite generated gross returns of positive 1.5% in the second quarter and 14% for the last 12 months. while ARIES Special Opportunities Fund 1 generated gross returns of minus 1.5% in the second quarter and 16.8% for the last 12 months. Our ACOP portfolio particularly benefited from strong growth in healthcare services and our energy investments. Let me now turn the call over to Jared to walk through our second quarter financial results in detail and to provide an updated outlook. Jared?