Ares Management Corp Q3 FY2024 earnings call

Management Statement and Operational Highlights:

• Macroeconomic backdrop constructive with fundraising momentum, modestly improving transaction activity, and solid fundamental performance in investment portfolios.
• Generated strong year-over-year growth in management fees (18% growth), fee-related earnings (24% growth), and realized income (28% growth). Global deployment of nearly $30 billion in the third quarter, year-to-date deployment $74.6 billion.
• Raised nearly $21 billion in gross capital in the third quarter, with over $64 billion raised year-to-date, tracking best year ever for fundraising.
• Fundraising highlights: $34 billion SDL III U.S. senior direct lending fund, EUR 2 billion sixth European Direct Lending Fund, launch of third vintage of special opportunities fund, and strong real estate and secondaries fundraising.
• Investing activities: New issue activity moderately improved, higher gross to net deployment ratio for private credit strategies. Deployed $16 billion in U.S. and European direct lending, $3.8 billion in alternative credit.
• Strategic acquisitions: GCP International to expand real assets presence in APAC and enhance industrial real estate and data center capabilities; Walton Street Mexico to capitalize on nearshoring trends.

Segment Performance:

• Private Credit: Generated strong year-over-year growth. Raised $20.9 billion in gross new capital in the third quarter, including over $13.5 billion in private credit strategies. Over the past 12 months, raised over $57 billion in private credit strategies. For example, SDL III, a U.S. senior direct lending fund, has approximately $34 billion of investment capacity and was already 30% invested at final close.
• Real Estate: Raised $2.9 billion in the third quarter, including $3.3 billion for the fourth U.S. Real Estate Opportunity Fund, a 50% increase over the previous vintage. Also raised $1.2 billion in real estate debt strategies, including over $850 million in European real estate debt.
• Secondaries: Launched products like global structured solutions and infrastructure secondaries fund with significant momentum. The new credit secondaries business completed Ares' largest credit secondaries transaction to date, a $500 million highly diversified portfolio of credit secondaries fund stakes.
• Wealth Management: Year-to-date equity flows into wealth management products totaled over $7 billion. Over $32 billion in AUM across semi-liquid wealth management products, a 57% increase from a year ago.

Guidance:

• Expect to end 2024 with total gross capital raised in the mid $80 billion range, well above the 2021 record of $77 billion.
• Anticipate strong future deployment due to record available capital and an improving market.
• Declared fourth quarter common dividend of $0.93 per share, a 21% increase over prior year's same quarter dividend.

Risks:

• Forward-looking statements subject to risks and uncertainties identified in SEC filings.
• Distribution costs impact on FRE margins.
• Performance lags in secondaries and potential challenges in certain market segments due to private equity lag effects.

Question and Answer: Q: Concerns about overcapitalization in private credit market given large funds raised.

A: Deployment is concentrated in large managers, not a sign of too much capital; deployment numbers show concentration and funds are being deployed in high-quality assets.

Q: Spread compression in private credit.

A: Reflects healthy economic backdrop, low defaults, and durable credit spread between private and traded markets; default rate significantly below historical averages.

Q: Distribution costs in wealth management.

A: Uniform across industry, with economies of scale as scaling occurs; cost per dollar raised is decreasing as scaling happens.

Q: Secondaries performance.

A: Lags due to private equity lag effect, but inception-to-date returns are as expected; focus on long-term performance and durable yield.