Ares Management Corp

NYSE:ARES

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to Ares Management Corporation's Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Wednesday, October 27, 2021.

I will now turn the call over to Carl Drake, Head of Public Company Investor Relations for Ares Management.

[Carl Drake, Head, Public Company, IR]

Good afternoon and thank you for joining us today for our third quarter 2021 conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. We also have a number of executives with us today who will be available during Q&A.

Before we begin, I want to remind you that comments made during this call contain forward-looking statements and are subject to risks and uncertainties, including those identified in our Risk Factors and our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results.

During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with Generally Accepted Accounting Principles. Please refer to our third quarter earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures.

Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Ares fund.

This morning, we announced that we declared our third quarter common dividend of $0.47 per share, which is consistent with our prior quarter dividend and represents an increase of 17.5% over our prior year's quarterly dividend. The dividend will be paid on December 31st, 2021, to holders of record on December 17th.

Now I'll turn the call over to Michael Arougheti who will start with some quarterly financial and business highlights.

[Michael Arougheti, CEO]

Great. Thank you, Carl and good afternoon everyone. I hope you're all doing well.

At our recent Investor Day in August, we highlighted that our growth strategy is supported by a number of key themes. We operate in very large and growing total addressable markets with meaningful competitive advantages. Retail and institutional investors around the globe continue to increase allocations to private market alternatives, and we've expanded our product offering and distribution to meet the strong demand. In addition, we're a consolidator in our market and our recent acquisitions have provided us with new growth engines and capabilities that further enhance our potential.

As you can see from our earnings report this morning, we executed well on our corporate objectives during the third quarter with strong results across the platform in fundraising, investing and fund performance.

I'll start with a few third quarter highlights and a business update. We generated particularly strong Q3 growth in our AUM and management fees, both of which were up over 50% on a year-over-year basis. We raised a record $51.6 billion year-to-date, as we continue to tap into investor demand for private market solutions. We also once again demonstrated the benefits of our deep teams and broad market coverage across our investment strategies with record deployment of nearly $20 billion.

Our rapid top-line growth, combined with the economies of scale that we drive through operating leverage, translated into more than 70% year-over-year FRE growth and another FRE margin record of 39%.

Adding in our monetization activity, our realized income grew 36% year-over-year with a contribution from our core fee-related earnings over 90%. Strong fund performance has also led to a new record level in net accrued performance income, which more than doubled over the past year. Based on our business prospects, market position, and the secular tailwinds in our industry, we're excited about the growth prospects for our business.

Let me update you on our two most recent strategic acquisitions that were both fully incorporated into our third quarter’s results Landmark Partners and Black Creek Group. At our Investor Day, we outlined a playbook for building businesses that centered on leveraging the scale of and the collaboration across the Ares platform to enhance value creation, capture revenue synergies, and expand products and distribution. We're in the very early innings of executing our playbook with both of these acquisitions. And we believe that the two acquisitions collectively were already modestly financially accretive to our after-tax realized income per Class A common share during the third quarter. We expect them to be more accretive going forward as we execute on our playbook of identified strategic and financial synergies.

The Landmark acquisition, which gave us a large foothold in the growing secondary market for private alternatives, is already yielding some exciting results after closing on June 2nd. In the third quarter, Landmark raised over $1 billion launched its ninth real estate fund, and is now exploring other product extensions and distribution channels.

On July 1st, we closed our acquisition of the Black Creek Group, which had approximately $13.7 billion of AUM at closing and it finished the third quarter with $15 billion of AUM. As previously discussed our Black Creek acquisition is highly strategic and provides a number of important synergies across our fundraising and investing activities. Black Creek add core and core-plus real estate products, which now enable us to offer a full suite of investment products within our real estate group, including get core, core-plus, value-add and opportunistic investment strategies. Black Creek also brings a best-in-class vertically integrated skill set in industrial logistics, a fast growing segment of the real estate market.

In addition to enhancing our product offerings, Black Creek also has one of the largest retail alternative investment fundraising platforms in the country. The Black Creek non-traded REITs and institutional open-ended industrial fund had a great start under Ares ownership with nearly $800 million of new equity capital raised in Q3, along with strong quarterly fund performance.

A key goal for us is to expand our retail distribution onto new broker/dealer platforms over time, and to meaningfully accelerate the pace of our retail and high net worth fundraising in the years ahead.

On that note, we recently announced the formation of Ares Wealth Management Solutions, which combines our high net worth fundraising capabilities with Black Creek's powerful retail distribution under one umbrella. Led by Raj Dhanda, our Global Head of Wealth Management, Ares Wealth Management Solutions will oversee the distribution of Ares investment products in the global wealth management channel. With more than 90 professionals and growing, we believe that Ares Wealth Management Solutions is one of the largest retail distribution platforms owned by any alternative manager. Our retail channel now represents nearly $50 billion in AUM, and we expect it to be among our fastest growth areas over the next five years.

The efforts that we've made over the past several years to diversify and scale our products suite are driving meaningful growth in our fundraising. During the third quarter, we raised more than $20 billion in new capital for the second consecutive quarter including more than $15 billion directly from existing institutional investors. By comparison, our nearly $52 billion in funds raised year-to-date already exceeds our record of $41 billion last year. Our Q3 fundraising was broad-based across our investment groups and included a particularly sharp increase in our perpetual capital, which accounted for more than $7 billion of the third quarter total.

Our perpetual capital vehicles, which include our public vehicles such as Ares Capital Corporation, Ares Commercial Real Estate, Ares Dynamic Credit Allocation Fund, our non-traded REITs, our Diversified Credit Interval Fund, our Aspida Insurance Platform, open-end commingled funds and a significant number of evergreen style strategic managed accounts were up 73% over the past year. We also raised $10 billion in long dated institutional commingled funds during the quarter. We're clearly benefiting from our strong investment performance, broad offering across a growing and diverse set of clients, and the demand for alternative investments from existing and new investors.

Within our Credit Group, we raised $800 million in the quarter and we held a final close of $1.1 billion post quarter end for our second U.S. Junior Capital Direct Lending Fund, PCS II bringing total fund commitments to $5.1 billion. Benefiting from the strong performance of its predecessor fund PCS II exceeded its $4 billion target and PCS I size of $3.4 billion.

In the final closing, we saw very strong participation from existing investors who contributed approximately 90% of the capital, including PCS I investors who re-upped by 140% on average, along with existing Ares investors from elsewhere on the platform who invested in the strategy for the first time. We also brought in 22 new investors to Ares. We continued to enjoy strong demand for our U.S. senior direct lending flagship fund with another $1.7 billion in equity commitments and $2.8 billion in debt commitments in the third quarter, bringing total fund capital raised to nearly $9.5 billion. We also added additional closings to our inaugural sports media and entertainment fund of about $270 million bringing total commitments to nearly $850 million.

As discussed on last quarter's call, we held our first closing of $1.6 billion in our new open-end core alternative credit fund in July, which employs an asset-focused income strategy in an evergreen format. The fund is expected to reopen for new investors next year.

We also launched a new open-end global multi-asset credit fund within our Liquid Credit Group, which is off to a good start with more than $350 million raised during the third and fourth quarters.

In our Private Equity Group, we had a final close of approximately a $1.5 billion in ACOF VI bringing total commitments to $5.7 billion. ACOF VI is off to a strong start with nearly 50% of the funds capital already invested or committed in a diversified portfolio across its four core industries of healthcare, services and technology, consumer and retail, and industrial.

We recently launched our second special opportunities fund and we just held a first close of approximately $3 billion this week. In this first close, we're excited that we'll reach three quarters of our targeted fundraise with over 45 investors and great support from existing and new investors. And our investors have given us the ability to upsize the fund. Given the capital raise in this first close, we expect our second special opportunities fund will be well in excess of the predecessor fund ACOF I of $3.5 billion. So altogether, over the past two years, the Private Equity Group has seen significant fundraising activity, with over $13 billion raised across its funds, including the second special opportunities fund commitments.

In Real Estate, we held the final close for our third European value-add real estate fund EPEP III totaling €1.5 billion, which exceeded the fund's initial target of €1 billion. Including co-investments the fund raised nearly €2 billion of equity for deployment. We believe that EPEP III represents one of the largest closed-end value-add real estate funds in Europe today. The fund has already deployed €500 million of equity across six properties to-date.

And finally, we raised nearly $500 million in debt and equity commitments in our two institutional open-ended real estate income funds, bringing total AUM in those two funds to a combined $4.3 billion.

In strategic initiatives Aspida raised nearly $500 million of AUM in the quarter and over 60% of the new capital is sub-advised by Ares. Aspida currently has $3.2 billion of total AUM with approximately 35% sub-advised by Ares. We believe that we now have the infrastructure in place to begin scaling this platform meaningfully in the years ahead.

And within Ares SSG following the final close of our Secured Lending Opportunities Fund III, which brought total fund commitments to $1.6 billion, which was nearly double the size of its predecessor fund, we launched our sixth flagship Asian Special Sits Fund and expect an initial close in the fourth quarter.

Going forward, we have a dozen commingled funds targeting a $1 billion or more size currently in the market or soon to be launched. And we have another nine institutional open-end and retail continuous offer funds in the market with $1 billion or more in AUM. When combining these fund offerings with the strong momentum in new large institutional SMAs, we expect continued strong fundraising over the next 12 months. Also as discussed at our Investor Day, we have an active pipeline of new funds in development across the platform.

Turning to our deployment, as we discussed at our Investor Day, the scaling of our investment teams is meaningfully increasing investment activity and efficiency per investment professional. During the third quarter, we invested nearly $20 billion of gross capital with approximately $11 billion in our drawdown funds versus $8.1 billion in the second quarter. We were very active deploying private credit across North America, Europe, and Asia as transaction demand remains robust, particularly as larger companies increasingly tap into this market. This strong pipeline is continuing into the fourth quarter.

During the third quarter, we were also particularly active investing in some of our favorite sectors, including industrial and logistics, in real estate and a broad set of healthcare investments across our credit and private equity portfolios. We also continue to find attractive opportunities in the growing renewable energy sector, an area where we've been actively investing since 2015 with more than $3.5 billion in commitments. A great example of this is our pending acquisition of Apex Clean Energy, one of the largest developers of renewable energy in the United States.

Our fund performance remains consistently strong across the platform as well. Notable highlights in the quarter include an impressive 19.4% quarterly gross return in our U.S. real estate equity fund composite, which brings 12-month performance to 60%. Our non-traded industrial REIT also generated strong gross returns of 10.5% in the quarter and more than 20% over the last 12 months. These funds are experiencing strong momentum from rent growth and supply constraints in the industrial sector.

In Private Equity, special opportunities and corporate private equity had another strong third quarter up 10.7% and 5.8% with 12-month gross returns of 60% and 54% respectively.

In our secondaries business, our Private Equity and Real Estate funds were up 12.9% and 11.1% respectively on a one quarter lag basis. And over the past 12 months, the funds were up 49.2% and 27.2% respectively.

And within U.S. and European direct lending Ares Capital Corporation generated a 4.2% net return in the quarter and 23.1% over the past 12 months, while European direct lending increased 3.6% in the quarter and 14.6% on a 12-month basis.

And now, I'll turn the call over to Jarrod for his remarks on our business positioning and our financial results. Jarrod?

[Jarrod Phillips, CFO]

Thanks Mike. Hello everyone.

The third quarter was yet another quarter of substantial growth for us across many of our financial metrics led by very strong growth in AUM, management fees and FRE.

As Mike discussed, the breadth of our platform was really on display during the third quarter as we performed for our investors across our significant funds. With a promising fundraising pipeline, continued strong fund performance, and our ability to source and find attractive investment opportunities across our groups, we remain very well-positioned for the remainder of the year and into the next.

As most of you know, we hosted our first Investor Day in August and provided some long-term financial guidance. We continue to be on track with this financial guidance, including our goal of achieving our AUM target of $500 billion or more by year-end 2025, and our expected compound annual growth in our fee-related earnings and dividends per common share of 20% or better through 2025.

I'll begin with a review of our AUM and fee-paying AUM as these metrics provide the foundation for the growth of our management performance fees. As of September 30th, our AUM totaled $282 billion, compared to $197 billion at the start the year and up more than 57% versus $179 billion at the end of Q3 2020. Our AUM growth for the quarter was supported by over $20 billion of capital raise as Mike described. Capital raising was primarily from flagship commingled funds and sizeable commitments from our perpetual capital vehicles.

In addition to our capital raising success, the final closing of Black Creek on July 1st added approximately $13.7 billion of initial real estate AUM increasing our total real estate groups AUM to over $36 billion.

Our fee-paying AUM totaled $172.7 billion at the end of the third quarter, an increase of 53% from the prior year driven by continued strong deployment in our direct lending, alternative credit and special opportunity strategies as well as continued robust capital raising. The closing of Black Creek added $9.3 billion of fee-paying AUM during the third quarter.

During the third quarter, we introduced a new AUM classification, perpetual capital. To conform with some of our peers and to provide better visibility on the nature of our long lived capital. Perpetual capital is in active fund with an indefinite maturity and where there's no requirement to return capital upon realizations. It includes our publicly traded vehicles ARCC, ACRE, ARDC, CADC, our insurance capital and certain other private commingled funds and SMAs. The growth rate of our perpetual capital is noteworthy. It increased 73% year-over-year, and now totals more than $70 billion or 25% of our AUM.

At quarter end, 88% of our AUM was either in perpetual capital or long-dated funds, highlighting the stability and durability of our business model. This long-term sticky capital was responsible for 94% of our third quarter management fees.

Our available capital sits at a record $85.8 billion at the end of the third quarter up more than 60% year-over-year. Our available capital leaves us well-positioned with our strong pipeline and creates optionality when we see potential market dislocations.

Management and other fees increased to $467 million for the third quarter, a 53% increase from prior year.

For the third quarter, we reported FRE of $182.3 million, an increase of 71% over prior year. Our growth in FRE reflects both continued management fee growth driven by significant fundraising and deployment, some benefit from catch-up fees primarily within ACOF VI, as well as continued margin expansion. Our third quarter FRE margin of 39% is a new record and is approximately 400 basis points higher than the third quarter of 2020. And we remain on track to meet our 45% plus FRE margin run rate by year-end 2025.

The third quarter also marks the first full quarter of management fees and FRE from our two recent strategic acquisitions of Landmark and Black Creek. These new groups have already begun to have a positive financial impact for Ares. For the third quarter, Black Creek contributed about $5 million to our FRE. We expect this to ramp up in Q4. Landmark also contributed strongly to our FRE with $21.9 million for the third quarter. We're excited for the progress we've seen in these early days for both of these acquisitions. And we expect their impact to continue to grow as we generate further revenue synergies.

We ended the third quarter with $50.3 billion of AUM not yet paying fees available for future deployment, a 39% increase from the prior year. This amount translates into $488.7 million of incremental annual management fees, which is approximately 33% of our last 12 months management fees. These management fees are expected to come in at a higher margin compared to our reported margin, as this revenue growth is following expenses already incurred.

For example, as we raise a new fund that pays us on invested capital, our cost to raise the capital, the cost for the distribution and IR teams, our investment teams and our business operation teams are already largely reflected in our P&L. This is a main driver of our margin expansion specifically for our more scaled strategies.

Our realized income of $198.9 million was up 36% largely supported by the 71% year-over-year growth in fee-related earnings. After-tax realized income per share of Class A common stock was $0.62 per share for the third quarter, up 29% from prior year. Based on current activities, realization activity is poised to pick up in the next six months compared to third quarter levels. You can see our strong outlook for future performance income through the impressive buildup in our accrued net performance income, which totaled $731.9 million at quarter end, up 127% over the past year.

On top of this, there's an additional $69 billion of uninvested incentive-eligible AUM that is not yet reflected in this amount. Overall, our incentive-eligible AUM achieved a new record of $170.5 billion at quarter end, an increase of 61% from the prior year.

I want to take a minute to reiterate one of the key points we outlined at our Investor Day involving our European style funds. Over the past five years, we've been assembling a growing stake of European waterfall style funds that are building future value through deferred realized performance income across nearly all of our investing groups. The future value continues to grow as we raise additional incentive-eligible capital that is European waterfall style. For example, year-to-date through the third quarter, approximately $21 billion of the nearly $52 billion we have raised was in European style waterfall funds, including $6.7 billion in the third quarter alone. As we continue to generate strong investment performance in these funds and raise new funds, we believe we'll be able to realize significant future performance income once these funds return capital to their investors, typically in the last few years of the fund's life. This expected realized net performance income from European waterfall style funds, which is largely not present in our realized income today, is expected to become a source of steady, recurring, and growing realized net performance income beginning in 2022, 2023 and beyond.

In summary, our established businesses continue to perform very well with significant dry powder and a very active deployment environment. With the completion and first full quarter of our recent strategic acquisitions under our belt, we are excited to further integrate these acquisitions and apply our playbook to use the power of our platform to extract the revenue synergies in the coming years. We have planted the seeds for additional diversification and strong growth in large end markets that we believe should position us very well for the exciting growth opportunities in our industry in the future.

I'll now turn the call back over to Mike.

[Michael Arougheti, CEO]

Great. Thanks, Jarrod.

Our industry has been undergoing meaningful transformation and rapid growth driven by strong secular tailwinds that we believe are accelerating. Institutional and retail investors are seeking to increase portfolio allocations to a broader range of strategies across the risk return spectrum and private alternatives are a central focus. We're seeing increased democratization of alternatives with meaningfully increased retail allocations through multiple channels and we believe that Ares Wealth Management Solutions positions us to lead in this part of the market.

We're also seeing industry consolidation as investors allocate greater wallet share with larger scale managers like Ares. And we believe that we're at the leading edge of this evolution and our business is well-positioned to drive long-term growth and corresponding value for all of our stakeholders.

I want to end by expressing my appreciation for the hard work and dedication of our teams around the globe. The amazing growth and investment performance that we've delivered is a direct result of our employee's strong commitment to collaborate work as one team with a shared set of common values. I'm also deeply thankful to our investors for their continued support of our company and their confidence in us.

And with that, just thank you all for your time today. And operator, we'd like to open up the line for questions.

[Operator]

[Operator Instructions].

First question will come from Alex Blostein of Goldman Sachs. Please go ahead.

[Alex Blostein, Goldman Sachs]

Hey thanks. Good afternoon, guys. So Mike, maybe just picking up on the last point you made around the Ares Wealth Management Solutions business that you've established, curious to get your thoughts about sort of what this business and what really Ares' product suite, sorry, in the Wealth Management channel going to look like two to three years from now. So we've got Black Creek on the real estate side, so that's one vertical. But how are you thinking about private credit? So outside of ARCC, what else you guys could potentially do there, secondaries, et cetera. Just trying to get a more holistic view of your vision for that part of the model?

[Michael Arougheti, CEO]

Yes, sure. Good question. Hey, Alex. So one thing I do want to highlight is the formation of Wealth Management Solutions is really not a revolutionary change here. What we're really doing is bringing together our already well-established private wealth and high net worth distribution with the Black Creek sales force and wholesaling capability. And by doing that, what allows us to do is just expand the product set, go broader into the wires and the Wealth Management platforms, it allows us to go deeper into the IBD and RIA channel and allows us to think about our offerings on a more global and holistic basis.

So this has been in the works and you can see that, we've already had great success in terms of the fundraising in both our institutional and retail products.

You're right today. The core products in the non-traded part of the market are the two Black Creek non-traded REITs, which you saw in the quarter, had great success, fundraising and performance and are accelerating. And I would expect given our brand and the resources that we're bringing to the table, but that growth will continue.

We've also had very good success on the private credit side with a diversified credit interval fund and believe that we're probably one of the largest diversified credit funds in the channel as well.

In terms of where the product can go, I think you should expect to see a host of new product across the platform as a lot of the big bank partners and channel partners similar to what we're seeing on the institutional side are going to shrink the number of GP relationships they have and do more with fewer brands. So what that would likely mean for us is something in the secondary space leveraging the capability set that came with the Landmark acquisition will likely have something in and around the real asset space and the infrastructure space, leveraging the capability set we have there. Given the strength of our private credit platform, I think there's an opportunity to explore various BDC structures, given the ARCC track record that we have in the traded markets and so on and so forth.

So I think you'll begin to see us and others put together a product set globally that is offering a cross section of pretty much everything that we're doing across the platform that will take some time. I think we have a real head start, because it's not like you can just flip a switch and create the product, create all the licenses you need, get all the selling agreements, build the technology. So there is a lot that goes into servicing this channel, but that requires a significant amount of investment that we've already made.

[Alex Blostein, Goldman Sachs]

Great. All right. We'll look forward to seeing that. The second question I have for you guys, just a numbers question around Black Greek. So $800 million really strong flows in the quarter. Could you expand on maybe just the types of platforms or geographies where these flows have come in is this kind of anything particularly unique about the quarter or that's a fairly good run rate we should be thinking about. And then with respect to performance at Black Greek, to your point Michael, so really, really strong, I think in the mid to maybe high teens year-to-date. How should we think about the performance fee from Black Greek to Ares for Q4? Are you guys going to characterize it as a FRE or not similar to sort of peers? I think you only get half of it, because you only own the asset for the half year, but just want to flush that out. Thanks.

[Michael Arougheti, CEO]

Sure. So I'll maybe answer the first part, which is it's pretty broad-based coming from different platforms and again, what we bring to the table together through the formation of Wealth Management is a deepening of the sales force and a deepening and broadening of the relationships with the different channels across IBD, RIA, and the wires. And so I would expect the growth to continue. We've seen it accelerate prior to our ownership and now under our ownership, given the power of our brand and the platforms, we're seeing it accelerate.

The performance obviously helps. And, it's probably no secret that industrial real estate and industrial logistics is a -- in demand attractive part of the market, just given the secular trends there. So I think that's a driver, not just a performance, but also of demand.

And then I'll let Jarrod to chime in here. But we're thrilled with the FRA contribution. Obviously, you can kind of look at what we acquired the platform for, and what they're delivering. And we would expect the FRE ramp to continue. Similar to a lot of our other funds, we obviously get paid as we deploy there. So as we continue to invest, we would expect to see the FRE trajectory continue.

We also have lumpy fees, in terms of disposition, acquisition, development that will also start to work their way into the P&L.

And then lastly, yes, in Q4, similar to a number of our peers, we would expect to see performance fees find their way into the P&L. You are correct in pointing out that being that we've only owned them for a half a year that we would get credit for half of those post-closing and consistent with the existing treatment by our peers, we would be taking that into FRE.

[Jarrod Phillips, CFO]

Yes, that's right, Mike. I think we don't see any real difference in those types of fees that we'll be earning ultimately than what our peers are earning at this time through the classification would be appropriate.

[Operator]

The next question is from Gerry O'Hara of Jefferies. Please go ahead.

[Gerry O'Hara, Jefferies]

Great, thanks. I guess picking up on Mike some of your comments as it relates to sort of exploring other product and distribution channels with respect of Landmark Partners. Clearly secondaries is one of the fastest growing areas of alternatives. But if perhaps you could give us a little extra color or context around that, I think we'd appreciate it?

[Michael Arougheti, CEO]

Sure, happy to Gerry. So maybe just to quickly remind everybody Landmark is one of the pioneers of the secondaries space and have been growing quite nicely prior to the acquisition and have done a good job broadening out the product set away from what I would call traditional LP-led private equity secondaries into the GP side of the market, but also away from PE.

I think that growth in Landmark in a couple of ways. One is a continuation of this expansion of the PE business towards more GP-led and structured solutions. Ares brings a very unique synergy to the table when you put these two businesses together just given the breadth of our global GP relationships and our direct investment capabilities. So as you begin to explore GP directs and things like that, our private equity capabilities and diligence capabilities, I think will be meaningfully value-add to that expansion.

Two, would be to grow the business away from PE into real estate, infrastructure and credit. Landmark already has a meaningful running head start in doing that. They're a market leader in the real estate side of the business. We're in the market now with our ninth fund and have demonstrated really strong performance there, which you can see in our filings. And we recently closed our second infrastructure fund, which is also off to a great start. So continue to expand that part of the business, expand our leadership position in real assets and then probably not surprisingly, given our broad credit franchises to look for ways to leverage that into credit secondaries.

Two, would be to globalize the business. Secondaries historically has not just been private equity centric and LP centric, but it's been North American centric. And given our global footprint, I think there's an opportunity for us to broaden out geography. And that's something that we'll explore.

And then to your point as well would be product extension, which is to look at ways to fund the growth opportunity here, not just with your traditional commingled institutional fund, but look at a number of potential retail opportunities and partnership relationships to scale into the growth opportunity that we see.

So a lot to do, already off to a strong start. We're three months into the integration. Couldn't be happier with the way that the teams are collaborating, fundraising momentum is good. Performance has been strong. And so a lot of that playbook as we said in the prepared comments while it's early is -- is we're executing well.

[Gerry O'Hara, Jefferies]

Okay. That's helpful. And then one maybe for Jarrod, perhaps a bit technical or maybe even a reminder, but can you give us a sense of the difference between the total AUM and fee-paying as it relates to Black Creek? I think I heard $15 billion as of current. And should we expect that to sort of come through over time or how does that work structurally?

[Jarrod Phillips, CFO]

Some of it is as a result of the fees being paid on NAV as opposed to total assets. So that's where a lot of your difference is going to be. And then there is some deployment there as well in the funds that are not the non-traded REITs.

[Operator]

The next question will be from Robert Lee of KBW. Please go ahead.

[Robert Lee, KBW]

Great. Good morning or good afternoon. Thanks for taking my questions up. I had a question actually on insurance in Aspida so. Obviously talking a lot about the wealth platform and the asset origination fundraising I can go through that, but can you kind of bring us up to Aspida and it's relatively small, but kind of -- if I remember correctly, when you first got into that business or were targeting that acquisition, one of the attractive features was its origination capability. So kind of what's your thoughts about the ability of that platform now, or the leverage points you may have to kind of accelerate growth of the insurance business?

[Michael Arougheti, CEO]

Yes. So I think you have to think about it organically and inorganically. So let's put inorganic to the side for a minute, but hopefully folks recognize just given the market backdrop that there should be a number of acquisition opportunities to scale that business over time.

But if you look at the organic, you then have to break it down into our reinsurance business Aspida Re and our life and annuities business as Aspida Life. And both of those have strong organic growth opportunities as well. The reinsurance part of the business is a little farther along in terms of its development having started really in earnest with the acquisition of F&G Re. As we talked about at our Investor Day today, taking on no new relationships there, we're doing about $1 billion dollars of flow business, and we would expect that to continue per annum.

And then on the life and annuity side, we have all of the pieces in place, the servicing and distribution capability that you articulated Rob is in-house now. And we expect to begin ramping that organically early in 2022. And you're right prior to the acquisition that platform without our brand and products that was doing roughly $2 billion a year of organic origination. So we would expect to do that plus.

So without growth beyond what we see today, and we talked about this at the Investor Day, the combination of the reinsurance business and the annuities business right now would probably have us be run rating about $3 billion per year of new origination. And we hope we can do better.

[Robert Lee, KBW]

Great. And then maybe as a follow-up, I'm just kind of curious when you have -- in Asia you have Fidante in Australia, the Sumitomo relationship. I'm just wondering if there's anything you could point to or think about and how that's maybe -- point to how that's maybe helped you start to accelerate fundraising in Asia? That's the question.

[Michael Arougheti, CEO]

Yes, I'm glad you pointed that out. As we talked about this, both of those, it's still early days, but we are long-term goals on the opportunity to invest and raise capital in that market. We are raising funds through the Fidante relationship and similar to what we're experiencing domestically that fundraising is scaling. In terms of the Sumitomo relationship, we're working on a number of initiatives that's been slower to develop as we would expect, but continue to believe that there's an opportunity to bring meaningful product into that market as well. So we're making good progress, Rob, but we'll kind of start talking about it more specifically when the numbers become a little bit more material.

[Operator]

Next question will be from Michael Cyprys of Morgan Stanley. Please go ahead.

[Michael Cyprys, Morgan Stanley]

Hi, good morning. Thanks for taking the question. Want to circle back to the capital deployment, $20 billion in the quarter. Quite an impressive number you guys put up, certainly substantial growth versus a year-ago. I was hoping you could maybe elaborate on what's changed in the business, in the industry that you're able to put up such a large level of deployment. And as you look out over the next 12 months, is this $20 billion figure here that you have in the quarter, something that could be sustained. How should we think about the path forward for deployment?

[Michael Arougheti, CEO]

Yes, it's a good question, Mike. I would expect that it could be, and I'd refer people to our Investor Day presentation just to look at how, not just our AUM, but our deployment has scaled over time relative to the resources that we're putting against that deployment. So not surprisingly as we're adding more people, adding more product, adding more office locations, broadening the product to attack different parts of the market.

The deployment is scaling in the aggregate, but it's also scaling more efficiently, meaning we're delivering more deployment and more AUM per investment professional as we scale. So there are economies of scale. And that's also part of it. I think what we have found and we've spent a lot of time talking about this in the context, particularly of our direct lending and private credit franchises is as we get larger deployment in many respects is getting easier. And that's because you create meaningful origination advantages, ability to attract and retain people. The value of incumbency in our portfolios, where we're seeing 50% to 60% of deal flow coming from existing relationships. And as our other businesses are scaling now in real estate and for PE, et cetera, we're beginning to see that same benefit of scale in terms of the investments we can make deployment and the ability to rate larger check sizes.

So I would expect it to continue. The markets are particularly conducive to good deployment here, just given the fundamental strength in the economy and liquidity in the markets. You may see one market slow and another ramp, but I don't see anything that's going to take us off this type of pace.

[Michael Cyprys, Morgan Stanley]

Great. And just as a follow-up question, we're seeing some firms in the industry acquire these platforms with direct origination capabilities and asset-based finance, consumer finance, and broadly just the non-sponsored marketplace in general. Just curious how you're thinking about that as an opportunity set for Ares and to what extent can it make sense for Ares to acquire these sort of asset-based and consumer finance platforms?

[Michael Arougheti, CEO]

Yes. So we are already doing that, and it's a good point because a lot of that opportunity really resides in and around our alternative credit insurance and opportunistic credit franchises, all of which are large addressable markets, which is also driving the deployment back to your first question. Depending on the end market will really drive whether we are investing in it as a control investor or investing in it as a non-control investor with a capital relationship. And we're doing both.

So we recently announced as an example of a strategic investment into a resi business, through Aspida in order to continue to drive asset sourcing there. However, we also recently announced the growth in our net lease business in our alternative credit franchise that will be owned and controlled. So we are doing a lot of that. It resides in different parts of the business depending on what the asset class is and what we think the durability of the asset opportunities.

[Operator]

Next question is from Kenneth Lee with RBC. Please go ahead.

[Kenneth Lee, RBC]

Hi, thanks for taking my question. Just one on the perpetual capital. How do you think about the growth rate going forward and specifically the growth rate relative to the risk of AUM? Thanks.

[Michael Arougheti, CEO]

I'm sorry. Ken, you broke up? Can you say that again?

[Kenneth Lee, RBC]

Yes, just a question around the perpetual capital. How do you think about the growth rate going forward and specifically it's relative to the rest of the AUM?

[Michael Arougheti, CEO]

Yes, it's been -- the good news for us is everything is growing at a high rate. Our perpetual capital has been growing probably modestly faster. And now with the Black Creek fund complex on our platform and the investments that we're making and we'll continue to make in Wealth Management Solutions, I'd expect that to continue, but it's something we laugh about over here because when the whole platform is growing at the rates that it's growing, it's tough for somebody to stand out, but the demand we're seeing in that channel is pretty significant.

And when we talk about perpetual capital, as Jarrod mentioned on the call, it includes our BDC and our mortgage REIT, which had turned back on and have been raising capital again after five-plus-years of not raising capital, and includes the non-traded REITs, which as we talked about are scaling and it includes the insurance business, which is scaling as well. So it's growing faster, but the whole platform is growing. It's not as though it's going to stand out as disproportionate.

[Kenneth Lee, RBC]

Got you. Very helpful. And just one follow-up if I may, in regards to the potential performance income, you could see from the European waterfall style funds you mentioned seeing it potentially in that 2022 and 2023 timeframe. I wonder if you could just give us a sense of the potential trajectory of when you might see that performance income and how could you distribute it across the various businesses? Thanks.

[Jarrod Phillips, CFO]

Why don't I can?

[Michael Arougheti, CEO]

Yes, hey, Jarrod just may be contextualize what -- why we're talking about it before we get into the numbers, I think would just be helpful to reorient people to what it is and how it's going to come in.

[Jarrod Phillips, CFO]

Yes, sure. Go ahead, Mike.

[Michael Arougheti, CEO]

Okay. So just at a high-level, hopefully, people appreciate the reason we're talking about when you're dealing with European waterfall, particularly European waterfall for credit funds, unlike an American style, where you are generating performance fees, and carry when investments are realized throughout the funds life. In a European style fund, you're effectively getting all of it at end of fund life, once the investors have gotten a full return of capital and their pref return. And so if you just think about all of these credit funds that are generating a disproportionate amount of their return through income, the minute you return investor capital and get through the hurdle that performance income just starts coming in on a regular basis quarterly. Given that you're now at end of fund life, but also just given that you don't necessarily require sales and monetization within the portfolio to drive performance income. So what we're trying to highlight is, while it will be performance income, our expectation is given the stable of funds that we've put together there, you all will begin to experience it as a much more predictable stable source of performance income, just given the nature of the underlying assets.

[Jarrod Phillips, CFO]

And, I think as you lookout, and we detail this in the Investor Day presentation; really we started to raise a meaningful number of these types of funds in 2017. And as Mike talked about, it's closer to the end of the life of those funds, that you start to see that recurring monetization that generally is in that six to 10-year timeframe. So when you take 2015, and you look out 2022/2023 is when they start to enter that mode where they've paid back that return to the investors, and they've reached that European waterfall level.

We estimate we had about $1.5 billion of European waterfall carry related to the funds that existed -- that exists today. And that number is increased slightly based on what we'd raise this quarter and continues to increase as we raise more European waterfall style funds. But we believe that that meaningful number is really going to start in that 2020 to 2023 range, and continue to build up from there into a recurring number that is easy to see and estimate, but is not captured today in our realized income.

[Operator]

The next question is from Adam Beatty of UBS. Please go ahead.

[Adam Beatty, UBS]

All right. Thank you and good afternoon. Just want to follow-up on the performance fee income, and kind of the ramp you're seeing from the European waterfalls. In the past, you've said or we've suggested that as shareholders, we should sort of focus mainly on FRE that's really how you're going to pay the dividend, et cetera. And realizing come from performance fees would be used to invest and build FRE capability if you will, I guess those are my words. But just wondering, how you're thinking about the implied step-up in investment capability and what kind of opportunities you might be anticipating for the coming years?

[Michael Arougheti, CEO]

If I understand the question correctly, Adam, I don't think that we anticipate given this European waterfall kind of wave that's going to start coming through the company two years from now or 18 months from now that we're going to change our capital management policy. We will continue to drive growth in FRE, paid the dividend to that growth in FRE consistent with the guidance that we've put out and use our performance income to reinvest in the fee engine. I think we're going to have to take a look when we get into that environment, where the investment opportunities are. But our expectation is that we're going to maintain our capital philosophy that we laid out many years ago. We think it's working, it's the best way for us to deliver sustainable growth over a long period of time.

The reason we're highlighting it though is I think the market, my own personal view is still grappling with the difference between fee-related earnings and realizations and how to contextualize realizations with a crew performance fee, et cetera, et cetera. I think that's something the market needs to evolve. This is going to be yet another nuance in understanding that not all performance income is created equal.

And that in these businesses that we run the performance income is more diversified supported by broader portfolios and supported by yield as opposed to a private equity portfolio that is requires monetization activity and is going to be lumpier. So I don't think that we're going to change the way we're thinking about balance sheet management and investing, but we'll have to cross that bridge when we get to it and see how it comes through.

[Adam Beatty, UBS]

Okay. Fair enough. You got it. Thanks Mike. And then just turning, I think, I heard in the prepared, you mentioned sort of increased appetite for a larger -- from larger corporate issuers for direct lending. And I guess that's been a trend over the private credit, the history of private credit and starting with smaller issuers, but just wondering whether there was something in terms of an inflection point that's driving that. And what you're seeing in the underlying dynamics and also whether that might open up additional opportunities just by virtue of the scale of the issuer. I don't know in terms of across the capital stack or co-investor things like that. Thank you.

[Michael Arougheti, CEO]

Sure. So yes, there has been a change in the market that's been a combination of folks like us accumulating enough scale to deliver these types of size solutions into the market. And it's come with what I would say maybe a comfort with an awareness of the value proposition that the private markets can deliver to a company versus the public markets around speed of execution, certainty of close, flexibility and structure, and terms, ability to scale and grow, if you're inquisitive, confidentiality, if you're public or you're doing a take private. So there are a lot of non-economic reasons why people borrow now in the private markets versus the public markets.

I think Kipp has talked about this quite well over the years and on the ARCC earnings call as well. But you also have something going on in the liquid markets, which is the leveraged loan and high yield markets are moving to scale. And as they move to scale, they're freeing up kind of the lower end of their market for the private markets to take share. And the big drivers of the use in the private credit space have been private equity. So as private equity dry powder has increased and as private equity has been a disproportionate user of private credit, you're just seeing larger private equity deals getting done outside of the loan in high yield market.

So there has been a shift in the market I would expect it to continue. We've historically talked a lot about these windows of opportunity that open up when the markets get volatile, when the banks are de-risking or the syndication markets were a little wobbly that we can come in with a private solution that's attractive. It feels to me. And I don't know Kipp feels different, he's on the line, that that's still an opportunity for us, but there's probably a more sustainable opportunity set for the private markets today than there was in prior cycles just given the maturation of the industry.

[Kipp deVeer, Head, Ares Credit Group]

Yes. I'd agree with you, Mike. It’s Kipp.

[Operator]

The next question comes from Chris Kotowski of Oppenheimer. Please go ahead.

[Chris Kotowski, Oppenheimer]

Yes good afternoon and thanks. Just wanted to understand your comments about the European waterfall carry, that, that amount, I'm assuming that amount is captured in the $732 million net accrued that we see on -- in Page 22. It's just that it'll come in kind of more linearly as opposed to [indiscernible], right.

[Jarrod Phillips, CFO]

We laid this out, if you go back and look at the slides in the Investor Day, that's actually not included today in that $731 million that is based on the funds that exist today, what the ultimate anticipated carried interest would be over that time in those European waterfalls, what you're referring on Page 22 is the unrealized position today. But we have the ability to look at those funds and understand the yield of the portfolio and expectations on exit. And that's where that that $1.5 billion comes from.

[Chris Kotowski, Oppenheimer]

Okay, all right. Got it. And then secondly kind of a modeling question. It's just, if you look at the expense level in the Operations Management Group that kind of bumped up from, it had been running in the mid-60s to low-70s and bumped up to 94. Is that a function of the acquisitions and that's a new normal now, or was there something unusually lumpy in that?

[Jarrod Phillips, CFO]

That's right, it is a function of a full quarter Landmark which I will remind everyone that June 1st acquisition. So this was our first full quarter with them. Then a first full quarter of Black Creek as well and just a slight increase in travel and some marketing and other items as we start to get back to normal from COVID.

[Chris Kotowski, Oppenheimer]

Yes, okay. But we should kind of think of this as a normal level.

[Jarrod Phillips, CFO]

I think that's fair.

[Operator]

And this concludes the question-and-answer session. So I'll now turn the call back over to Michael Arougheti for any closing remarks.

[Michael Arougheti, CEO]

No, I don't think we have any. We appreciate everybody spending time with us today. We're just really happy with where things are and the strength of the quarter and look forward to speaking to everybody again next quarter and thanks for your support.

[Operator]

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available through November 24, 2021, by dialing [phone] and to International callers by dialing 1 [phone]. For all replays, please reference conference number 10159844. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.

Thank you all for attending today. You may now disconnect your lines. Have a great day.