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 October the 27th, 2022. I will now turn the call over to Kyle Drake, Head of Public Markets, Investor Relations for ARIES Management.

Good morning and thank you for joining us today for our third quarter conference call. I'm joined today by Michael Arrighetti, our Chief Executive Officer, and Jared Phillips, our Chief Financial Officer. 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 SSU 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 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 ARIES fund. This morning we announced we declared our fourth 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 December 30th, 2022 to holders of record on December 16th. Now I'll turn the call over to Michael Arrighetti, who will start with some quarterly financial and business highlights.

Great. Thank you, Carl. And good morning, everyone. I hope you're doing well. In the face of geopolitical tensions and rising inflation, energy costs and interest rates, our business continues to generate steady growth and deliver strong relative performance for our investors. During the third quarter, we continued our strong growth in our AUM and fee-related earnings despite the challenging environment and a continued slowdown in overall primary market activity. Our suite of products continues to resonate with our investors as we raise more than $14 billion of gross commitments for the quarter bringing the year-to-date fundraising total to more than $44 billion. We're pleased with the breadth of our fundraising activity to date, which only included $2.1 billion in fundraising this year from our largest commingled funds. The flexibility of our investment strategies is also reflected in our steady deployment, which remained strong and was relatively flat versus our activity levels a year ago. These factors drove growth in our AUM metrics, management fees, fee-related earnings, and realized income ranging from 21% to 28% on a year-over-year basis. Before I walk through some quarterly business highlights, let me start by framing why our business has been so resilient during volatile markets like we're in today. It all starts with our management fee-centric business, which provides more stable realized income compared to more performance fee-based and balance sheet heavy business models. For example, on a year-to-date basis, we've generated more than 90% of our total fee revenues from our management fees. And over the same period, 92% of our realized income was derived from our fee-related earnings. This rich mix of FRE-based earnings has also been steadily increasing over the past three years. Another important component of our business is our asset-like balance sheet, with balance sheet investments representing less than 0.5% of our total AUM. In addition to generating strong returns on equity, this means that we're less susceptible to changes in market values for risk assets, particularly during times of high market volatility. The structure of our AUM in long-dated and perpetual vehicles also provides insulation from client withdrawals. About 88% of our AUM and 95% of our management fees are from either long-dated funds or perpetual capital vehicles. and due to the long-term nature of this capital, we have not experienced significant redemption issues during volatile periods. This enables us to be patient investors and utilize the capabilities of our experienced teams and our significant dry powder to make new investments and to support portfolio companies during more difficult markets. We believe that the nature and mix of our AUM also provides stability. Approximately 60% of our assets under management are tied to a diverse range of credit strategies. These credit investments provide protection from declines in valuation multiples during economic downturns, since our credit positions are generally in the top half of the capital structures of our portfolio investments. In other words, across the spectrum of private assets, our AUM focus in credit is generally positioned to have comparatively less risk. We believe this also provides meaningful benefits to both our fund investors and to ARIES stockholders during rising interest rates environments as more than 90% of our debt assets firm-wide are floating rate and can earn higher income as interest rates increase. As an example, ARCC reported on Tuesday that its core earnings would have been 8% higher had the prevailing short-term rates of September 30th been in effect for the entire third quarter. As rates continue to increase, this should continue to enhance ARIES capital's core earnings as evidenced by the 17% year-to-date increase in ARCC's third quarter dividend, and it provides for the potential for increased ARCC Part 1 fees as well, all else being equal. Across the rest of our asset mix, we believe that our growing AUM in real assets with investments in real estate sectors with strong rent growth and in infrastructure assets that have built-in inflation escalators will be well positioned to perform in the current market environment. We also believe that our private equity business is also differentiated with its focus on resilient, less cyclical, higher growth industries, along with its flexible capital strategy of deploying assets across debt and equity in distressed and other opportunistic assets. So turning to deployment, the current market environment is providing opportunities for us to continue to take market share and be a consistent capital provider when other traditional providers and public sources are retrenching. Our significant dry powder and the flexibility of our strategies enable us to provide a variety of capital solutions to private companies or to play in liquid markets as relative value shifts. Our deployment for the third quarter remains strong at $18 billion, with more than $12 billion in our credit strategies during Q3. We actively invested across the credit spectrum, including take privates, add-on acquisitions, secondary market purchases, financing asset portfolios, and many other types of situations. Nearly half of our activity in our U.S. and European direct lending businesses combined in the quarter was tied to existing incumbent borrowers, and our focus continues to be on larger upper middle market companies. In real assets, we selectively invested over a billion dollars, primarily in our core real estate segments of industrial and multifamily, and we invested half a billion dollars across our infrastructure strategy. We also deployed over $2 billion in private equity across both our ASOF and ACOF strategies. Our special opportunities team is very excited about the opportunities being presented, particularly investing in high-yielding debt in the more volatile liquid markets. Our secondaries group deployed over $500 million as they're seeing increasing transaction activity for both LPs seeking liquidity and GPs seeking additional capital for growth. And we'd expect secondary opportunities to gain momentum over the coming quarters as private equity investors and managers seek solutions for the capital allocation and balances that they're facing. We also invested $1.4 billion across ARIES SSG and VRR-affiliated insurance platforms. There's been a lot of discussion in the market about the denominator effect and slowing allocations to alternatives by investors. Through the end of the third quarter, we have not experienced this to the same degree and we understand others have. Our leading floating rate credit strategies and real asset strategies also continue to resonate with investors as they are seen as either beneficiaries or insulated from some of today's market headwinds. Overall, for the third quarter, we raised $14.2 billion across more than 50 different funds and accounts with more than 90% of the direct capital derived from our existing investor base. One highlight for the quarter was our final closing of our inaugural sports, media, and entertainment fund at $3.7 billion in commitments within the fund and related vehicles. This strategy is a great example of how we can leverage our team and the advantages of our broad platform to create exciting new adjacent strategies for our investors. ASOFT II raised $1.3 billion during the third quarter and just held its final closing at its hard cap of $7.1 billion, which is more than double the size of our inaugural fund from three years ago. At quarter end, our tenth U.S. value-add real estate private equity fund held its final closing at $1.8 billion, well ahead of its target and over 75% larger than its predecessor fund. And we're pleased to report that our infrastructure debt strategy is being well received as we closed on another $500 million, bringing the total amount of AUM to $3.9 billion for our fifth fund. We also increased our AUM in our first Australia and New Zealand direct lending fund as we continue to build out investment capabilities and capital in the Asia Pacific region. Within real estate, our fourth U.S. opportunistic fund, which was recently launched, has attracted significant interest from investors and is expected to hold a first closing in Q4. With a $3 billion target, we anticipate that the early closings will equal or exceed the size of the predecessor fund. Our perpetual capital funds also continue to see strong inflows. Our two non-traded REITs raised approximately $850 million of equity commitments during Q3 with approximately $100 million in redemptions. Overall, debt and equity commitments raised from perpetual funds totaled $4.2 billion during the third quarter, as perpetual capital increased 24% from the year-ago period to $89 billion. We expect to add at least one wire house for a non-traded redistribution during the fourth quarter, with more expected next year. Our affiliated insurance company, Espida, is beginning to gain momentum and add $1.2 billion of new annuities in the third quarter across its reinsurance platform and new retail platform that launched at the end of June. Espida now has over $4.5 billion in AUM, of which a little over 50% is now sub-advised by our own investment teams. We're also excited about the expanding opportunity set for our secondaries business. On November 7th, we'll be completing the final step of our integration process and fully transitioning the landmark business to be referred to as ARIES Secondaries to better leverage the platform and the strength of the ARIES brand. We continue to invest heavily in the secondaries group by adding senior talent, including real estate capabilities in Asia Pacific, and our new revenue synergies are playing out as we expected. We plan to launch our third infrastructure secondaries fund and we expect to launch new strategies within credit and private equity secondaries. The Retail Private Markets Fund is also starting to see inflows pick up, and we're partnering with retail technology platforms to enable access on Wirehouse platforms next year. Now let me turn to the future pipeline. As discussed on our last earnings call, we are at the beginning stages of launching a significant fundraising cycle for a number of funds where the predecessor funds were among our largest commingled funds. In addition to our ongoing activities with perpetual funds, managed accounts, and our existing commingled funds we've had in the market this year, we have recently launched or expect to launch commingled funds in the next three months that will target more than $45 billion inclusive of fund leverage. We continue to expect first closings on some of these new funds in the first half of 2023. This $45 billion of target fundraising includes our two largest fund series, our sixth European Direct Lending Fund, and our third U.S. Senior Direct Lending Fund, along with others, including our second flagship closed-end alternative credit fund, our seventh corporate private equity fund, our fourth U.S. opportunistic real estate fund, our second climate infrastructure fund, and our third infrastructure secondaries fund. As the public markets continue to report losses across equities and fixed income, our fund results were generally strong across our various credit, real estate, and private equity strategies. In direct lending, our senior direct lending and junior direct lending strategies generated gross returns of 1.4% and 0.3% for the quarter, and 12% and 6.7% for the last 12 months, respectively. European direct lending returns also held up well, totaling 3.4% in the quarter on a gross basis and 11% for the last 12 months. The European direct lending portfolio is benefiting from lower overall leverage, strong interest coverage, and generally strong covenant packages. Real estate continued its strong performance as our U.S. equity composite generated gross quarterly returns of 2.8% and 33.4% over the past 12 months, along with increased NAS for both of our non-traded REITs. Our focus on industrial and multifamily continues to generate strong performance based on the fundamental tailwinds for rent growth, generally in excess of inflation in these sectors. Our European real estate composite declined 1.8% gross for the quarter but increased 9.4% for the trailing 12 months. Our private equity portfolio performed particularly well during the third quarter, despite the overall declines in the public equity markets. Our ACOF composite increased 2.7% gross in the quarter and is up 10.7% over the past 12 months, primarily driven by strong revenue and EBITDA growth across the portfolio, as we've invested behind resilient sectors with attractive secular tailwinds. Our special opportunities business continues to thrive in this environment, not only raising and deploying a significant amount of capital in the quarter, but also generating strong Q3 gross returns of 4.1%. Over the past 12 months, ASOP1 has generated gross returns of 9.8%. In secondaries, where returns are reported on a one-quarter lag basis, our private equity strategies declined 5.6% on a gross basis. largely related to currency depreciation related to our European assets. But over the past 12 months, the strategy still generated a positive 14.8%. Real estate secondaries was very strong, up 6.4% on a gross basis in the quarter and up 45.4% over the past year. And now with that, let me turn the call over to Jared to walk through our third quarter financial results in detail and to provide an updated outlook. Jared.