Ares Management Corp Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Craig Siegenthaler - Bank of America - Analyst : We're seeing some very big drawdown fund raises across the industry and the private credit semi-liquid vehicles continue to lead in the private wealth channel. And just of note, one of your big competitors just closed a sizable drawdown in the institutional channel and Ares just raised the $34 billion Senior Direct Lending Fund III, which is an industry record. So just given this ramp in industry AUM and dry powder, do you see any challenges to deployments heading into next year, especially with the reopening of the BSL market?

Question: Craig Siegenthaler - Bank of America - Analyst : Mike, thanks for the point there. I think 1 thing driving that has been the lack of fundraising in the public BDC market the last couple of years versus '20 and '21. Do you think that changes next year with overall rerisking activity picking up? And if it does, do you think the consolidation trend has the potential to actually head in the other direction?

Question: Alexander Blostein - Goldman Sachs Group, Inc - Analyst : First question around just asset-backed finance opportunity and kind of private credit 2.0 in a way that we've talked about for the last couple of quarters. Lots of focus on origination being really kind of the driver of differentiated opportunities in the space. So curious if you can sort of update us on your origination capabilities of their additional partnerships you think you need to do there in order to kind of further accelerate that part of the market?

Question: Alexander Blostein - Goldman Sachs Group, Inc - Analyst : Got it. All right. That makes sense. Jarrod, one for you on FRE margins. So getting a little bit of a reset this year. So I appreciate the color there. I guess, not surprisingly, like kind of given the dynamics in the retail distribution channel and just focus on top line growth. So we've talked about that in the past. But I guess if you look out into 2025 and maybe we could exclude the noise from FRPR entirely from kind of this discussion. But is it likely for Ares to get back to, call it, a more normal 100 basis points-or-so of FRE margin expansion into 2025, again, kind of excluding FRPR noise?

Question: Alexander Blostein - Goldman Sachs Group, Inc - Analyst : No, I totally get it. It's a timing thing, and it's a worthwhile investment. Makes sense.

Question: Brendan O'Brien - Wolfe Research - Analyst : This is Brendan O'Brien filling in for Steven. I guess to start, there's been a lot of focus around the spread between private credit and the broadly syndicated market and how much that has narrowed over the past year. While you do partake in some of the larger club deals out there, as you alluded to in the prepared remarks, you have a much bigger focus on the middle market relative to some of your competitors. So I just wanted to get a sense as to whether you see any differences in spread compression in the middle market relative to larger deal activity. And at a higher level, do you view the spread compression as being a function of increased competition or is simply a lack of new supply or some combination of both?

Question: Brendan O'Brien - Wolfe Research - Analyst : That's great color. And for my follow-up, I wanted to touch on Part 1 fees. I know you gave the sensitivity in your filings for ARCC and ASIF. However, you've talked about in the past the impact of increased transaction activity and the offset lag impact on Part 1 fees. And with ASIF scaling very quickly, I just wanted to get a sense as to how we should be thinking about the increased contribution from ASIF going forward and the increased transaction activity relative to the rate headwind on Part 1 fees and whether it's possible that this could actually result in Part 1 fees continuing to grow even as rates come in?

Question: Bill Katz - TD Cowen - Analyst : So you had guided to sort of mid-80s -- maybe covered just a little bit earlier, I might have missed it. Mid-80s gross inflow number for the full year, which would suggest another strong fourth quarter in front of us. I was just wondering if you could unpack where you're seeing the strength? And as you think through into next year, I was wondering if you can maybe help us think through the building blocks as we sort of think about comps to this year?

Question: Bill Katz - TD Cowen - Analyst : Okay. And just a follow-up. We're another three months into the wealth management opportunity and certainly early days in general and a very large denominator. What are you hearing from your relationships on the distribution side? It does seem like the distribution economics or the price of economics are deteriorating. But is there a concentration opportunity here of just Ares as emerging as a disproportionate winner, are you actually seeing that in any of the conversations with the distributors on how they're allocating these opportunities for channel access?

Question: Brennan Hawken - UBS - Analyst : Sort of a follow-up on that last question and totally appreciate it might be a hard question to answer with precision. But are these increasing distribution costs something that's happening sort of uniformly across the different platforms or should we anticipate this headwind would sort of cascade across the different platforms and continue to put upward pressure beyond the impact that you laid out here today? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 1:00PM, ARES.N - Q3 2024 Ares Management Corp Earnings Call

Question: Brennan Hawken - UBS - Analyst : Yes. Sorry, I was not clear. I didn't mean whether or not this is very specific and not other alternative firms. What I meant is are you seeing it at only some distribution partners and then it could spread the other distribution partners, meaning that we could continue to see this ramping as you continue to --

Question: Brennan Hawken - UBS - Analyst : Okay. I appreciate that, Mike. And then when we think about the, Jarrod, $90 million to $95 million waterfall, you laid out. How does that compare to your prior expectations of the $60 million to $70 million just from the Europeans? I know -- is the increase just purely from adding the American waterfall or did the European outlook improve as well?

Question: Michael Cyprys - Morgan Stanley - Analyst : Just a question on the private wealth channel. Hoping you could maybe elaborate a bit on the new core infra strategy, how you see the opportunity set with that product in the channel? And maybe you could elaborate a bit on the flow strength in October. I think you mentioned that's the largest month of inflows to date in the channel. Maybe just unpack the strength there, what you're seeing and how you see the cadence of expanding your presence on platforms into '25?

Question: Michael Cyprys - Morgan Stanley - Analyst : Great. And then just a follow-up question on real estate. I think you've mentioned that you expect to see transactional activity improve across the real estate marketplace as well as potentially flows improve on the nontraded REIT space. Maybe you could just unpack that a bit? Maybe just elaborate where you expect you to see the improvement here? What do you see driving that? And maybe speak to some of the areas you're leaning into on the deployment side?

Question: Brian Bedell - Deutsche Bank - Analyst : Maybe I'll put 2 together for my 2 questions, both in the retail segment. One, on the distribution channel. I think at Investor Day, you were still at something like just 5%-or-so of your addressable market. So as you look to expand that and potentially can expand in channels that don't have as heavy of the supplemental distribution fees, how do you think about the growth into that addressable market just from getting more advisers selling your product? That's one. And then dovetailing with that is the product launch pipeline. I think you also said at Investor Day looking at about 8 to 10 semi-liquid perpetual products by '28. You're already at seven now. And I would -- seemingly, you've got more ideas with the sports products and then potentially maybe comment on products you could even do with GCP. Just should we be seeing more than 10 products maybe by '28?

Question: Ken Worthington - JPMorgan - Analyst : Are distribution costs something you consider when focusing your resources in wealth management or is it something that you might expect you would reasonably consider in the future? And do you get the sense that distribution is getting more sophisticated when allocating their access to

Question: Ken Worthington - JPMorgan - Analyst : In secondaries, returns negative this quarter, negative over the last 12 months. We know performance lags, but it still seems like that area is underperforming. Demand still is quite good for Ares' secondary products. So maybe what's going on here from a return perspective?

Question: Mike Brown - Wells Fargo Securities - Analyst : Great. Thanks for squeezing me in here. I guess maybe another follow-up on the wealth market. We've seen some interval fund filings from some peers. You guys have a large successful interval fund with a partner and that just crossed the $6 billion AUM level. Just wanted to hear what's your outlook here for this fund structure? Can you iterate on that product structure and then even expand the distribution there to a wider wealth spectrum?

Question: Mike Brown - Wells Fargo Securities - Analyst : Yes, great. Thank you for all those thoughts, Mike. Just a quick follow-up on FRPR. If I heard the guide correctly, I think it was for 160 to 170 for 4Q so I guess the midpoint there would be about in line with where it was in the fourth quarter last year. And I guess, the comp ratio would imply a bit of a high level for 4Q. I know it was quite elevated in the third quarter so can you just maybe unpack the right way to think about the comp ratio for FRPR as we think about, call it, '25 or into '26?