Ares Management Corp Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Executive Team Changes: Kip DeVeer and Blair Jacobs appointed co-presidents to drive strategic initiatives and develop leaders.
• 2024 Highlights: Celebrated IPO anniversaries, set new financial records in AUM, fee-paying AUM, fundraising, deployment, etc. Invested $106.7 billion in 2024, with $32 billion in Q4.
• 2025 Outlook: Optimistic about improved transaction environment leading to growing net investment activity. $133 billion of dry powder and strong fundraising momentum. GCP International acquisition expected to close, enhancing capabilities in real assets.
• Wealth Channel: Significant growth in 2024, with over $10 billion in equity raised and $18 billion in total AUM. Focus on expanding distribution and partnerships.

Segment Performance

• Credit: In 2024, management fees and fee-related performance revenues (FRE) increased. Fourth quarter investment activity in US private credit, real estate debt and equity, and secondary solutions drove a 34% increase from the prior year. Fundraising in credit was strong, with $15.7 billion in equity and debt raised, and 12 CLOs issued.
• Real Assets: Fourth quarter fundraising in real estate debt strategies was $2.4 billion. Expectations for continued recovery in 2025. GCP International acquisition will enhance real assets capabilities.
• Secondaries: AUM grew nearly 18% year over year. Strong fundraising across private equity, infrastructure, and credit.
• Wealth Channel: Raised over $10 billion in equity and over $18 billion in total AUM for the year. Q4 inflows were $3.1 billion in equity and $6.9 billion in total AUM. Market share increased to nearly 10%.
• Insurance (Aspida): Raised over $2.3 billion in equity commitments, with over $20 billion in total assets. Primary fixed annuity volumes nearly doubled.

Guidance

• Expect another strong fundraising year in 2025, modestly lower than 2024 but still robust. GCP International acquisition expected to close, enabling new fund launches. Dividend increased by 20% to $1.12 per share. European-style net realized performance income expected to more than double in 2025.

Risks

• Market environment uncertainties, including potential regulatory changes, bid-ask spreads, and market seasonality. Risks associated with achieving fundraising and deployment targets.

Question and Answer Q: Good morning, Mike, Jarrod, and Kip and Blair. If you're on the call, congrats on the promotions. So I have a long-term expense question. G&A expenses rose by more than 20% in 2024, and I know there's some noise in there like Crescent Point in Q4 2023 that actually helped the comp, but also you had a new New York City lease coming in this year. So we wanted your high-level thoughts on the go-forward core growth rate of G&A. And, also, how are supplemental distribution fees in the wealth channel a factor? And then you're also closing GCP, I think, this quarter, as you said. So what will be the near-term lift from that?

A: Sure. Thanks, Craig. I would say that first off, going through the story of G&A this year, supplemental distribution fees are really the major driver of the changes year over year as those increase pretty dramatically up to about $50 million for the full year, about 50 basis points of what we raised during the year of that $10.8 billion that we raised in that channel. Now we do expect to continue to raise more in that channel and for those amounts to increase. So I would expect that those expenses would increase as well. However, the one thing I'd point out is as we open new channels of distribution, we're less reliant on those channels that charge these upfront or rev share fees. So if you look at that 50 basis points for the full year, it was actually only 43 basis points of the capital raised in the fourth quarter. So we will still see some growth in that, and that's growth that's highly correlated to fundraising. We also have marketing events and other sales events from the institutional channel, which you'll also see correlated more to our fundraising than you will towards anything else. The remaining part of that is the occupancy expenses that you mentioned, which are probably the largest driver of our G&A expenses. As you noted, we did just bring online a couple of new floors here in New York due to the expansion of our headcount. We also have our new headquarters in Los Angeles, and we're still carrying some of our old headquarters. So that will eventually roll off towards either the end of next year or early in 2027, meaning that you'll see LA expenses go down while New York will increase over the next five-year period. Those expenses, along with expenses like technology and items of that nature, are much more correlated to our headcount. So as you see our headcount grow, you will see that G&A expense grow. Now as we've been able to show scale, we would look to revenues growing at a higher percentage than our both headcount and therefore those G&A expenses. And then maybe the last point to bring in is the GCP acquisition, which will bring in some new expenses in G&A. However, we talked about it in our call when we announced the acquisition that their margins were relatively similar to the margins that we see in our current real estate business, excluding the impact of data centers, which right now is we mapped out at about $20 million FRE drag as we wait for funds to launch out of that space, which we expect will be in the near term. But we'll carry that essentially expense load until you start to see those data centers launched off the platform.

Q: Good morning. Thanks for taking the question. Most of my questions have been asked and answered, so I'll just keep it to one. Last quarter, you spoke to an expectation for improving FRE margin in 2025. There a decent you spoke a little earlier on G&A, which is helpful. But how should we think about potential magnitude for that, and what are the primary factors driving it?

A: Hey, Brennan. Thanks. I'd say that it's not too different than what we talked about on our Investor Day. We expect that zero to 150 basis points expansion. Of course, in the past, we have gone above that. When we go above that, it generally is a result of a very active macro backdrop, which allows for deployment to go up higher than maybe we would expect. So the pace of deployment really dictates the speed at which margin expands in many cases because our just remind everybody as a credit predominant business, we're paid on deployment, meaning that we are paying people prior to us earning fees from some of the effort that will be put in. So as dollars are put into the ground and put to work, that enables us to expand our margin at a faster rate. So really, a lot of it comes from how fast will we be able to have that net deployment number increase, and that's what drives a lot of that expansion. Further, as we start to see things like A REIT and AI REIT, return to positive fundraising on the common side, they've been net flat with the common and the 1031 exchange for the year. So as we see that move back to positive and we've seen a lot of positive signs, that will be something that continues to drive positive economics into the real estate business and allow us to expand margins there as well. And overall, we talked a lot this year about our distribution fees. Now that we raised the $10.8 billion in AUM in that retail space that we had that $50 million distribution fees. Now we'll get a full year revenue off of those as opposed to just that partial year that you get throughout. So, really, that was a flat to net negative to our margin for the year. Next year, we'll get the benefit of now having a full year of that in the ground. Of course, there'll be more that we raised and there'll be more expense there. But it begins to create long-term tailwinds to that margin expansion. There's a number of different areas. And like I highlighted earlier, we continue to seek scale and we continue to look to do more with what we have. And as we build out more product, more fundraising capability, and more origination capability, with what we have in the ground today, that enables us to show scale and grow those expenses at a slower rate than we grow our revenues.