Q1 2024 Earnings Summary
- Ares's wealth management platform is experiencing significant growth, with first-quarter equity inflows totaling $2 billion, up 50% from the fourth quarter and nearly 4x the amount from a year ago. This growth is driven by expansion of distribution partnerships, new product launches, and increasing international demand, positioning Ares for continued diversification and growth.
- Ares is strategically positioned to capitalize on significant opportunities in infrastructure debt and real estate debt, given the $5 trillion capital opportunity in digital infrastructure and the undersupplied debt markets. Ares is a leading debt provider in these markets and expects to benefit from challenges in traditional banking sectors by expanding its lending business through opportunistic acquisitions and increased participation in new issue volumes.
- Despite industry trends suggesting a slowdown in private credit fundraising, Ares is bucking the trend with strong fundraising momentum, exceeding previous fund sizes in its third senior loan fund and sixth European fund. This indicates strong LP demand and solidifies Ares's position as a market leader in private credit fundraising and deployment.
- Reliance on Procyclical Wealth Management Channel: Ares Management's increasing fundraising from the wealth management channel, which raised $3.2 billion in total AUM in the first quarter (up from $2 billion in Q4 and $900 million a year ago), could pose risks due to the channel's procyclicality. As Michael Arougheti noted, relying heavily on this channel means potentially investing capital regardless of market conditions, which could be challenging during downturns.
- Tightening Spreads in Direct Lending: The spreads in direct lending have tightened and may tighten further unless new activity accelerates. This tightening could impact yields and profitability in Ares' lending business, as acknowledged by Michael Arougheti: "I would say that spreads have tightened and until we see new activity accelerate, you could expect they may tighten a little bit more from here."
- Muted Transaction Activity Affecting Deployment: Current transaction activity is muted, with a shift towards refinancings rather than new issuances, which may hinder Ares' ability to deploy capital and grow fee-paying assets under management. Michael Arougheti mentioned that "Given that transaction activity has been muted... the transaction activity is skewing more towards refis than new issue activity."
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Opportunistic Credit Opportunity
Q: How do you see the opportunity in opportunistic credit unfolding?
A: The higher-for-longer rate environment creates significant opportunities in opportunistic credit. High-quality assets with increased debt burdens need non-dilutive liquidity solutions. Owners seek capital to address liquidity challenges, and we're optimistic about this part of the market, planning to launch our next vintage fund this year. -
Direct Lending Dynamics and Spreads
Q: What's your perspective on current direct lending and spreads?
A: We see high gross deployment, maintaining and gaining market share. Transaction activity is skewed towards refinancings over new issues. Spreads have tightened and may tighten further until new activity accelerates, but they've stabilized recently. -
Gross vs. Net Origination Outlook
Q: How will the gross vs. net origination ratio trend?
A: Historically, about 75% of gross deployment translates to net. Last quarter saw an unusually tight ratio due to large repayments. We expect improvement as transaction activity picks up. -
Management Fee Growth Outside Credit
Q: What are the biggest sources of fee growth outside credit?
A: Our real assets platform, including real estate and infrastructure, is growing and diversifying. Infrastructure presents significant opportunities in climate infrastructure and energy transition. Our insurance solutions platform is also a meaningful growth engine. -
Reliance on Wealth Management Channel
Q: Why avoid over-reliance on the wealth channel for fundraising?
A: The wealth channel is procyclical, which can limit investing when opportunities are best. By maintaining balance with institutional capital, we can be more consistent and potentially generate outperformance. -
Infrastructure and Real Estate Debt Opportunities
Q: How are you capitalizing on infrastructure and real estate debt?
A: In infrastructure debt, there's a $5 trillion opportunity in digital transformation, like data centers. The debt market is undercapitalized relative to equity. In real estate, high-quality assets face debt service challenges, creating opportunistic debt investment opportunities. -
Private Credit Fundraising Trends
Q: Is private credit fundraising slowing down?
A: We haven't experienced a slowdown; demand remains strong. Our leadership position allows us to continue raising capital despite industry trends. -
Management Fee Rate Trends
Q: Any notable changes in management fee trends?
A: Fee rates have remained flat or slightly up across strategies. Quarterly variability is due to mix shifts, but headline fee rates are holding steady. -
Third-Party Insurance Business
Q: Can you detail the third-party insurance business and fees?
A: Our affiliate, Aspida, is on track for $25 billion AUM by 2025. We earn administrative fees and arm's length fees on sub-advised strategies. Our third-party insurance clients represent over $50 billion with close to 150 relationships. -
Wealth Management Distribution Expansion
Q: Can you update us on wealth management distribution expansion?
A: We have about 150 wealth professionals and continue to add products and distribution partners. Our existing fund family raised $3.2 billion in Q1, up from $2 billion in Q4 and $900 million a year ago. International distribution is also showing strong results. -
LP Expectations on Hurdle Rates
Q: Are LPs pushing to raise hurdle rates due to higher interest rates?
A: We haven't felt that pressure. The current construct has worked for over 30 years, and while the topic arises infrequently, there's no significant move towards floating rate hurdles.