Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ares Management Corp (ARES, Financial) declared a third-quarter common dividend of $0.93 per share, representing a 21% increase over the same quarter last year.
- The company achieved its single best quarter of fundraising in history, raising $26 billion in gross capital.
- Assets under management (AUM) grew to a record $447 billion, up 18% year-over-year.
- Fee-related earnings grew by 22% year-over-year, supported by strong deployment and fundraising activities.
- The company reported a 29% increase in AUM not yet paying fees, indicating strong future revenue potential.
Negative Points
- General and administrative (G&A) expenses spiked in Q2 due to the first-ever front-line VGM pounds, impacting overall costs.
- Despite strong performance, the net accrued performance income declined slightly to $919 million, primarily due to the reversal of carried interest in certain funds.
- The company faces competitive pressures in the private credit market, which could impact future deployment and returns.
- There is a potential for increased defaults and non-accruals in the broader private credit industry, despite Ares Management Corp (ARES) outperforming the market.
- The company is experiencing higher supplemental distribution fees, which could impact margins if not offset by increased revenues.
Q & A Highlights
Q: We were looking for an update on the private equity product launches mentioned at your Investor Day. How is that progressing?
A: Momentum continues with $4.5 billion of capital raised across the platform in Q2. We are scaling new products like PMFASF and ASF. We expect the next product to be in our infrastructure business. Additionally, our international wealth distribution is accelerating, with 30-35% of flows now coming from outside the US.
Q: Is the industry past the peak in non-accruals, defaults, and write-downs in private corporate direct lending?
A: Default rates should go up the longer we are in this cycle, but not to alarming levels seen in COVID or GFC. The stresses have been liquidity-driven due to rate hikes, not earnings erosion. As rates stabilize or decrease, we expect relief and continued strong credit performance.
Q: How would you rank the priority areas for strategic M&A, and has there been any improvement in valuations for potential targets?
A: Our focus areas remain insurance, Asia, real estate globally, and digital infrastructure. The bar for acquisitions is high, requiring financial accretion and strategic value. We are seeing some improvement in valuations, but our approach remains disciplined, targeting high-quality businesses at attractive multiples.
Q: How do you expect the gross to net origination ratio to evolve in the back half of the year?
A: We expect continued improvement in the gross to net origination ratio. Our pipeline is skewing towards new transaction activity, and we are seeing increasing signs of activity in real estate. Historically, our gross to net ratio was about 50%, and we anticipate a return to those levels.
Q: Can you discuss the state of competition in credit and the impact on loan documentation?
A: In the lower and traditional middle market, there has been little structural deterioration. In the upper middle market, some loosening is appropriate for higher quality borrowers. We remain disciplined, often turning down transactions over documentation concerns. Pick structures are used prudently to capture excess return without constraining cash flow.
Q: How do you see the opportunity set evolving post-regional bank crisis, especially in a more benign interest rate environment?
A: The opportunity set remains robust. We are transitioning from resolving distressed portfolios to capturing assets moving into private markets due to regulatory capital pressures. Rate cuts may reduce the velocity of distressed deals but will spur transaction activity and capital deployment in private markets.
Q: Can you provide an update on your non-sponsored direct lending business and its growth prospects?
A: Our non-sponsored direct lending business is growing, representing 5-10% of our direct lending origination. We are investing in industry verticals like sports media and life sciences, which are showing strong growth. While it won't overwhelm our sponsor-led business, it is a meaningful and differentiated part of our strategy.
Q: How do you view the potential for partnerships with traditional asset managers to expand retail distribution?
A: We are open to partnerships with traditional asset managers, as seen in past sub-advisory agreements. Our focus is on high-quality growth, ensuring that our origination is delivered at high fee rates to maximize profitability. Any partnership would need to align with our capacity to deploy and diversify distribution.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
