Ares Management Corp

NYSE:ARES

Earnings Call Transcript 2024-Q3

[Operator]

[Operator Instructions] Welcome to Ares Management Corporation's Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Friday, November 1, 2024.

I will now turn the call over to Greg Mason Co-Head of Public Markets, Investor Relations for Ares Management.

[Greg Mason, executive]

Good morning, and thank you for joining us today for our third quarter conference call. Speaking on the call today will be Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. We also have several executives with us today who will be available during the Q&A session.

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 in 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 and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in Ares or any Ares Fund.

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.

Note that we plan to file our Form 10-Q later this month. This morning, we announced that we declared our fourth quarter common dividend of $0.93 per share on the company's Class A and nonvoting common stock, representing an increase of 21% over our dividend for the same quarter a year ago. The dividend will be paid on December 31, 2024, to holders of record on December 17.

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

[Michael Arougheti, executive]

Thanks, Greg, and good morning, everybody. I hope you're all doing well. During the third quarter, the macroeconomic backdrop for our business remains constructive, as we continue to see fundraising momentum, modestly improving transaction activity and solid fundamental performance in our underlying investment portfolios.

Lower short-term rates are starting to have a positive impact, leading to higher valuations for rate-sensitive assets and increasing real estate transaction activity. The more supportive market tone is showing up in the strength of our pipelines across the firm, and we're optimistic that we'll see increasing transaction volumes over the coming year as the expected rate cutting cycle progresses.

During the third quarter, we generated strong year-over-year growth across our financial metrics, including 18% growth in management fees, 24% growth in fee-related earnings and 28% growth in our realized income. This growth was supported by global deployment of nearly $30 billion, which is our second highest quarter on record.

This brings year-to-date deployment to $74.6 billion and should set 2024 up to be a record year. In addition, we raised nearly $21 billion of gross capital during the third quarter. With over $64 billion raised year-to-date, we are also now tracking to have our best year ever for fundraising.

We're poised for strong future deployment due to our record level of available capital and an expectation that an improving market will broaden out and strengthen our deployment across even more strategies over the next year.

Our fundraising success this year is in part due to the heightened institutional and retail investor demand that we're seeing across our private credit strategies, including global direct lending, alternative credit, real estate debt and infrastructure debt as well as strong interest in our liquid credit strategies.

While reported private credit fundraising in the market has declined for 3 years straight, we believe that our differentiated experience is a testament to our market-leading position and long-dated performance through multiple cycles.

Investors continue to prioritize investments that can generate durable yield and excess return over the traded market equivalents regardless of the absolute level of interest rates. We're also seeing strong interest in a variety of secondary strategies and improving interest in real assets.

In the third quarter, we raised $20.9 billion in gross new capital, including more than $13.5 billion across our private credit strategies. Over the past 12 months, we've raised more than $57 billion in our private credit strategies.

To touch on a few fundraising highlights in the credit business: In the third quarter, we raised $2.8 billion of equity and debt commitments in a final close for SDL III, our third U.S. senior direct lending fund. We expect SDL III will have approximately $34 billion of investment capacity, including related vehicles and anticipated leverage. This amount is nearly double the size of our second vintage and reflects our leading franchise in U.S. direct lending.

We're already well underway investing in this third fund, which currently has $11 billion committed across 195 companies. In the third quarter, we also closed on approximately EUR 2 billion of equity investments in our sixth European Direct Lending Fund, bringing total LP commitments to date to approximately $14.5 billion compared to EUR 11 billion for the prior vintage.

We anticipate holding a final close for this fund in the fourth quarter, and we believe that this will be the largest European direct lending fund ever raised in the market. We have called more than EUR 3 billion of capital for the fund and are well on our way to building a well-diversified portfolio.

In terms of new fund launches, we recently launched the third vintage of our special opportunities fund and expect the first close beginning later in this fourth quarter. We're also working on a number of new products around our sports, media and entertainment strategy, including both open- and closed-end products for institutional and retail investors. We're seeing significant demand from investors seeking access to the growing and differentiated value for various sports-related franchises.

Our team was an early pioneer in this strategy and has become a trusted partner in a large addressable market, which we estimate is more than $750 billion, as professional sports leagues around the globe continue to open up to institutional capital.

Fundraising for the third quarter totaled $2.9 billion, including a final close for our fourth U.S. Real Estate Opportunity Fund, which brought the fund and related vehicles to $3.3 billion, a 50% increase over the previous vintage.

Our ability to meaningfully scale this latest vintage in a challenging real estate fundraising environment reflects our leading real estate franchise and the relative performance that we've delivered for investors.

During the quarter, we completed the first close for our fourth European value-add real estate fund totaling $1 billion, and we are on pace to exceed the previous vintage, which raised EUR 1.5 billion. And finally, in real estate, with less aggressive competition from the banks and increasingly attractive risk-adjusted opportunities in debt, we continue to see strong demand across our real estate debt strategies as evidenced by the $1.2 billion that we raised in the quarter, including over $850 million in European real estate debt.

We're also seeing strong momentum across our secondaries group, as we scale existing strategies and launch new fund series. For example, we recently launched a secondaries product focused on global structured solutions, which seeks to provide financing directly to the general partners of private funds. The fund and related vehicles will soon hold its first close with approximately $700 million in equity commitments, which is already 70% of the fund's initial $1 billion target.

We're also actively scaling the third vintage of our infrastructure secondaries fund, and we expect to raise nearly $400 million shortly, which would bring the fund and related vehicles to approximately $1.4 billion in equity commitments or more than 40% larger than the previous vintage.

Our new credit secondaries business is also seeing significant momentum, and the team recently completed Ares' largest credit secondaries transaction to date a $500 million highly diversified portfolio of credit secondaries fund stakes.

The secondaries market is a promising area for Ares when you match the growing need for liquidity with our more than 1,000 sponsor and 2,600 institutional investor relationships around the globe.

As many of you know, we continue to be a leader in the wealth channel with accelerating momentum and an expanding product suite. Our solutions offer individual investors core private markets exposure delivering durable income, diversified equity and tax advantaged real assets to the wealth channel globally.

During the third quarter, we raised over $2.5 billion of equity commitments and nearly $4 billion in total AUM, including leveraging our semi-liquid well products. Through the third quarter, our year-to-date equity flows into wealth management products totaled over $7 billion, which is more than 3x the fundraising pace over the same period last year.

Including leverage, we've raised over $11 billion in wealth management AUM through September 30, and momentum has continued into the fourth quarter. We recently launched our seventh wealth management product, a tax-efficient core infrastructure fund, which successfully raised an initial $400 million in equity commitments in September and October.

And lastly, October was our largest fundraising month to date with approximately $1.2 billion in equity flows across our semi-liquid wealth products. We continue to make meaningful progress expanding our distribution partnerships. We're now on 60 platforms, up 50% in the past year and we continue to see our products gain traction across the U.S. wirehouses, private banks, RIAs and other distribution platforms globally.

We're pleased with the international expansion of the wealth distribution as 37% of year-to-date inflows are from outside the U.S. And in total, we have over $32 billion of AUM across our semi-liquid wealth management products which is a 57% increase from a year ago.

When combining AUM from our publicly traded vehicles and high networth investors in our campaign funds, our total AUM from the retail channel exceeds $88 billion.

For the full year, we now expect to end 2024 with total gross capital raised in the mid $80 billion range, well above our 2021 record of $77 billion. Campaign funds or institutional closed-end funds have accounted for approximately 1/3 of fundraising year-to-date, while SMAs, wealth management, public funds and Aspida accounted for over 50%.

We expect our fundraising activities for the remainder of the year and into 2025 to consist of more than 35 active funds including 15 different campaign funds along with continued inflows into our perpetual funds and SMAs, CLOs and through Aspida, our growing insurance affiliate.

Turning to our investing activities. New issue activity has moderately improved from earlier this year. This has driven a higher gross to net deployment ratio for our private credit strategies, which totaled 42% for the third quarter, an improvement over last quarter's 38% and up from 28% in the first quarter.

In U.S. and European direct lending, we invested nearly $16 billion of gross commitments in the quarter across more than 100 companies with net deployment totaling nearly $7 billion. Given the breadth of our origination capabilities, we invest across the spectrum of middle-market companies, including an increased focus on core and lower middle market opportunities due to the superior relative value currently available in those market segments.

We also leveraged our incumbency to extend and expand our relationships with many of our strongest borrowers. During the third quarter, approximately 60% of our U.S. direct lending deployment was with existing borrowers and we roughly doubled our dollar commitments to these portfolio companies.

We believe this illustrates the power of our incumbency and our ability to grow alongside our best-performing portfolio companies. By focusing on the lower and core middle markets, we can generate higher risk-adjusted returns with broader coverage and can establish relationships with companies earlier in their growth phases.

With an alternative credit, we deployed nearly $3.8 billion in the third quarter, an increase of more than 35% compared to the same quarter last year. With over $40 billion in AUM and a team of 75 investment professionals focusing on both the liquid and illiquid sectors, we believe that we are the largest manager in the higher returning illiquid asset-based credit segment with approximately $22 billion of nonrated AUM.

While our team has deep experience with over 30 asset classes in the U.S. and Europe, we focus on investing in relative value, which enables us to hone in on certain asset buses in favor and where scaled capital is required. Most recently, our team has been active across fund finance, residential assets, auto leases, digital infrastructure and asset management.

A couple of great examples include our $1.5 billion joint venture with CAL Automotive for prime auto leases and our role in leading a GBP 755 million preferred equity commitment for Wembley Park, which is a mixed-use neighborhood in London.

In addition, our alternative credit team continues to partner directly with banks on a bilateral basis to provide capital relief solutions, including the recent financing agreement that we announced with Investec Bank.

It's important to note, though, that we're continuing to scale our $19 billion of liquid investment grade rated AUM through partnerships with third-party insurance companies and Aspida. We're seeing significant growth in our liquid investment-grade asset-backed segment, which has increased at a 36% CAGR over the past 5 years.

In addition, Aspida continues to generate strong organic growth with more than $2 billion in fixed annuity originations and reinsurance flows in the third quarter, and we expect continuing strong flows in the fourth quarter.

Within the real asset markets, we are at a meaningful inflection point with rising transaction activity, strong fundamental performance and promising supply-demand dynamics on the horizon.

Across our real estate strategies, we invested more than $2 billion in the third quarter, which was up meaningfully versus the same period a year ago, with a continued emphasis on our highest conviction sectors, including industrial, multifamily, student housing and single-family rental.

Within our Infrastructure segment, we continue to focus on renewable energy and related digital infrastructure investments. And before I provide an update on our recent transaction announcements, I want to take a minute to highlight the long-term growth opportunities that we see in the global industrial real estate, digital infrastructure and clean energy sectors.

Over the past decade, we've been expanding our investment capabilities and capital base in the industrial and renewable energy markets to take advantage of rising demand in e-commerce, the reorganization of global supply chains, infrastructure for AI, the demand for clean energy and manufacturing reshoring, which is reversing more than 4 decades of globalizing trade.

For instance, estimates suggest that the reshoring of manufacturing will require over 1 billion square feet of logistics support in the next decade. And by 2030, the U.S. will need up to 250 terawatt hours of new energy production to support AI and the expanded manufacturing base.

As an example, Ares made a strategic investment in X-Energy, which is developing and building fourth generation of small modular reactors or SMRs. Recently, X-Energy announced that several strategic partners led by Amazon, invested approximately $500 million in a new financing round for the company. both Amazon and X-Energy, along with existing investors such as Dow and Ares are seeking to advance the largest deployment to date of safe, clean and reliable SMR nuclear power aimed at the growing digital and manufacturing economies in the U.S.

Now with that perspective, I'd like to reemphasize the strategic importance of our 2 recently announced acquisitions and real assets which we believe will not only diversify our business mix, but also enhance our growth profile.

The GCP International transaction enables us to expand into 3 critical areas of importance for our firm. First, it expands our real assets presence in the strategically important APAC region, including in Japan and Vietnam within many of our highest conviction sectors like industrial, digital infrastructure and clean energy.

Following our SSG acquisition in 2020 and Crescent Point last year, we have been strategically evaluating inorganic growth opportunities in the region and GCP International scale, asset positioning, track record and team represented far and away the most compelling opportunity of the nearly 40 managers that we considered.

Second. The transaction expands our vertically integrated industrial real estate capabilities into Japan, Europe, Vietnam and Brazil. As one of the largest vertically integrated industrial players in the U.S., we believe that expanding our vertical capabilities globally will enhance our value proposition to our LPs and other market participants while enabling us to create new revenue streams as these businesses scale.

Third. We are gaining a global presence in a rapidly growing data center development and asset management business with a $7 billion near-term development pipeline, which complements our existing climate infrastructure capabilities. And while I focus on just these 3 opportunities, there are many more compelling growth and synergy opportunities that GCP International presents, and we believe that we are buying at an opportune time in the real estate cycle with a manager that provides significant growth potential.

You may have also seen that we signed an agreement to purchase Walton Street Mexico, an industrial-focused real estate manager with $2.1 billion in AUM as of June 30. This transaction enables us to capitalize on the nearshoring trends that we're seeing across supply chains, and the Walton Street Mexico team is particularly well positioned to take advantage of this market opportunity.

We believe that there are also intriguing synergies with their institutional client base for other Ares products. In both of these cases, we had long-standing relationships with certain principles of these firms and we believe that each team will be a great cultural fit. Clearly, the addition of these 2 firms will provide important scale to our Real Assets group and makes us one of the leading players in private equity real estate across the globe.

And I'll now turn the call over to Jarrod to discuss our financial results in more detail. Jarrod?

[Jarrod Phillips, executive]

Thanks, Mike. Good morning, everyone. In the third quarter, we continued to deliver strong results with high-teens year-over-year growth in AUM and management fees and mid-20s growth in FRE and Real Asset income. With $64 billion already raised this year and more than $74 billion in gross deployment, we're tracking toward a record year for both gross fundraising and deployment.

A record amount of $85 billion in shadow AUM, or AUM not yet paying fees, ideally positions us to capitalize on a return to a more normalized state of deployment and realizations in many sectors. When you combine this AUM not yet paying fees, with our FRE-rich earnings mix and future European waterfall realization potential, we believe we have strong visibility for future earnings for our stockholders.

Looking at this quarter's earnings, starting with revenues. Our management fees totaled over $757 million in the quarter, an increase of 18% compared to the same period last year, primarily driven by positive net deployment of our AUM not net paying fees.

Fee-related performance revenues totaled $44 million, primarily from the third quarter crystallization of our open-ended core alternative credit fund, along with a smaller contribution from APMF, which typically will be earned quota.

This represents our first significant full year realization from our open-ended core alternative credit funds, and we anticipate this will now be an annual crystallization occurring in the third quarter of each year. We continue to expect the majority of our credit group FRPR to be realized in the fourth quarter as most of our separately managed accounts crystallize annually at the end of the fiscal year.

At this point, we're forecasting a range of $160 million to $170 million in fee-related performance revenues and $60 million to $70 million in net FRPR for our credit group in the fourth quarter. The amount remains subject to change as these performance fees are based on total return through December 31 and could be impacted by underlying changes in the value of these loans from movements in credit spreads and foreign exchange rates.

Compensation expenses, excluding FRPR compensation, increased 13% for the year-ago period, driven by additional headcount along with higher Part 1 fees and related compensation. Overall, our G&A expenses were essentially flat quarter-over-quarter as the benefit from lower event expenses was offset by higher consulting and professional fees, including about $3.5 million of onetime professions.

We expect G&A expenses will move moderately up due to higher expected supplemental distribution fees related to our strong start in Q4, along with higher seasonal travel expenses, costs for our newly expanded New York office lease and recent headcount growth.

Now let me spend a moment on the supplemental distribution fees, which are paid on certain wealth management funds raised. Quarterly supplemental distribution fees totaled $13 million, a decline from the second quarter of $15 million, which reflects a fundraising mix shift from the domestic wire houses to more international wealth management distribution partners.

We were able to offset $4 million of supplemental distribution fees through a decrease in compensation expense associated with the Part 1 fees and the FRPR that we have discussed previously.

During the quarter, the $9 million of net supplemental distribution fees reduced FRE and lowered our FRE margin by 107 basis points. On a year-to-date basis, net supplemental distribution fees have reduced our FRE by $24 million and our FRE margin by 102 basis points.

These supplemental distribution fees are more than triple the expense amount in the same period last year. Although these supplemental distribution fees initially put pressure on our fee-related earnings and FRE margins as we scale in the channel, we believe that the addition of the associated perpetual life assets in the wealth channel, which pay management and incentive fees would be very valuable. Importantly, we expect to gain greater absorption in these onetime fees as we scale the channel.

During the third quarter, FRE totaled approximately $339 million, a 24% increase from the previous year, primarily due to higher management fees and FRPR. Our FRE margin at 41.1% remained essentially unchanged from the same quarter a year ago, in part due to the aforementioned supplemental distribution fees.

For the fourth quarter, we expect a meaningful sequential increase in our total fee income along with our total FRE, but a sequentially lower overall FRE margin of approximately 40%. This is due in part to the impact of the supplemental distribution fees we discussed lower margins on the expected ramp in credit FRPR in the quarter and higher compensation costs primarily from new hires.

For the full year, we do expect to show moderately higher FRE margins in 2024 compared to 2023. With interest rates beginning to decline, we anticipate an acceleration in FRE growth and an expansion in our FRE margin in 2025 driven by a broadening out of deployment across a greater number of our investment strategies and improved operating leverage within our wealth can. As we flagged in the second quarter at this point in our fund's life cycle, the third quarter was lighter on European-style waterfall realizations.

As a reminder, approximately 85% of our accrued net performance [indiscernible] and since we're not yet in the full harvest period for our funds, 60% to 70% of net realized performance income from our European funds is generally recognized in our fourth quarter, with 30% in Q2 and the remaining 10% split between the first and third quarters.

In our third quarter, we generated only $9 million of net realized performance income, driven mainly by real estate and credit funds with European style waterfalls, and an absence of material sales from funds that have an American style waterfall.

For the fourth quarter of 2024, we are estimating $90 million to $95 million in net realized performance income from both our European and American style funds. For 2025, we continue to have good visibility on the continued expected ramp in our European style realized net performance income. For 2025, we estimate European style net realized performance income to be between $225 million and $275 million.

And with a better macro environment backdrop, we would expect to potentially recognize more of our American style of crude performance income as well. For 2026, we continue to expect another significant year-over-year increase in our European style net realized performance income compared to our 2025 levels.

Realized income in the third quarter totaled $339 million, a 28% increase from the previous year and after-tax realized income per share of Class A common stock was $0.95, up 14% in the third quarter of 2023. As of September 30, our AUM was $464 billion, up 17% from the year ago period.

Our fee paying AUM reached $287 billion at the end of the quarter, up 16% from the previous year. Our AUM not yet paying fees available for future deployment increased to approximately $74 billion at quarter end, representing approximately $722 million in potential annual management fees, not including any Part 1 fees or FRPR.

Our incentive eligible AUM increased by 15% compared to the third quarter of 2023, reaching $267 billion. Of this amount, over $88 billion is uninvested, which represents significant potential for performance income.

In the third quarter, our net accrued performance income jumped nearly 10% quarter-over-quarter to $968 million, primarily from relatively strong capital appreciation and income compounding above our hurdle rates across our credit, real assets and private equity funds.

Finally, I'd like to highlight our strong Q3 fund performance, which is underscored by broad outperformance within our private credit strategies. Across our credit group, our strategy composites generated quarterly gross returns ranging from 2.5% to 6.5%, with 12-month gross returns ranging from 8% to over 20%.

Our credit portfolios continue to see positive fundamental growth in limited credit issues, and we believe we are well positioned for a variety of economic scenarios, particularly as approximately 95% of our corporate credit assets are senior in the capital structure.

Notably, ARCC reported quarterly improvements in nonaccruals to levels well below historical averages, improved interest coverage and double-digit portfolio company EBITDA growth. Furthermore, the weighted average loan-to-value in the loan portfolio stood at 43%, significantly lower than the market average of roughly 50% over the past 10 years.

Across our real asset composites, we generated gross returns and infrastructure debt of 2.6% for the quarter and 9% for the last 12 months. Our real estate equity strategies are delivering strong returns relative to comparable market equivalents.

We continue to see positive fundamentals and valuations in our real estate portfolios. And in the third quarter, we saw appreciation in each of our real estate fund composites. This includes positive quarterly returns and our 2 nontraded REITs, which collectively brought in modest net inputs.

In general, we believe we saw a bottoming in property values for most asset classes during the spring and are now seeing more downward pressure on cap rates while underlying property cash flows generally continue to rise. Our corporate private equity composite at a gross quarterly return of just under 2%, as 1 fund was impacted by its public position in the Sabres Value Village.

Our most recent corporate private equity fund ACOF VI has generated gross quarterly and 12-month returns of 4.8% and 22.8%, respectively, and has a since inception gross internal rate of return of 24.2%. Our corporate private equity portfolios continued to demonstrate strong fundamentals with double-digit year-over-year organic EBITDA growth.

Now I'll turn it back to Mike for closing comments.

[Michael Arougheti, executive]

Great. Thanks, Jarrod. I continue to believe that Ares is well positioned to succeed in an improving transaction environment. Our management fee-centric business and asset-light balance sheet are critical elements of our strategy as we seek to capitalize on the growth of our platform and our industry. There are many positive secular drivers influencing our business, including assets moving out of the global banking system to private credit, the significant need for infrastructure investment and clean energy the growing penetration of alternatives in the wealth channel and the continued consolidation of GP relationships among institutional investors.

We also expect to see improving growth for our real asset strategies as rates begin to normalize we believe that these growth engines will contribute more fully to our overall growth and associated operating efficiencies in 2025.

As always, our talented team collaborating across the globe drives the current and future success of our business and I'm deeply grateful for their hard work and dedication. I'm also deeply appreciative of our investors' ongoing support for our company.

And with that, operator, I think that we can now open up the line for questions.

[Operator]

[Operator Instructions] We'll take our first question from Craig Siegenthaler with Bank of America.

[Craig Siegenthaler, 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?

[Michael Arougheti, executive]

Sure. Thanks, Greg. A couple of things to highlight. As we said in the prepared remarks, private credit fundraising is actually down sequentially for the last 3 years. So one of the things that you're actually seeing, and this has been a trend that's been in place for close to a decade, that the dollars getting raised and the dollar is getting deployed are actually becoming more concentrated in the hands of the larger managers.

I think that has a lot to do with the ability for the larger managers to get deployed with significant diversification and just the benefits of scale as it relates to origination, investment in portfolio management, risk systems, et cetera. So I don't think it's a read across when you look at the size of the funds getting raised by the market leaders to say that there's too much capital in the market.

When you look at the deployment numbers, it would tell you something different, which is the deployment is also concentrated and we're each finding ways to continue to grow the business nicely in high-quality assets in what has been a fairly benign M&A market.

So I think we're in a good place. As we talked about in the prepared remarks, if you look at SDL III on that $34 billion fund, we're already 30% invested at the final close. So that will give you some perspective just in terms of the pacing of the capital raising and the capital deployment.

And without getting into all of the details, but we did talk about this again in the Investor Day presentation a couple of months back, the TAM for private credit continues to grow and it's important that people appreciate that this is not just a sponsor lending business, this is a broad-based private credit business across corporates, real estate, infrastructure, alternative credit, it's global.

And there are secular trends in place. You mentioned, obviously, BSL market coming back, but there's a general debanking trend that I think is outpacing whatever competition we're seeing from the traded sub investment-grade market. So a long-winded way of saying we're obviously paying attention to the competitive dynamic. But as we see it, we actually still think that the private credit market is undercapitalized relative to the opportunity.

[Craig Siegenthaler, 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?

[Michael Arougheti, executive]

I don't actually, again, because I think that the consolidation trend is rooted in a view that we've held for a long time that scale drives performance. When you look at the public BDC market, you are already beginning to see meaningful dispersion in performance across the manager landscape.

And I think that's an important thing to keep an eye on as we get into this broader conversation about quality and size. So I think the public BDC market is an important part of the ecosystem, but obviously less important. The other thing to keep in mind, the published numbers that most people refer to around the size of the private credit market do not include public BDCs. So the data, for example, it's published is is excluding the publicly traded BDC market.

[Operator]

We'll take our next question from Alex Blostein with Goldman Sachs.

[Alexander Blostein, 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?

[Michael Arougheti, executive]

I think the simple answer, Alex, is no. Obviously, partnership is an important tenet of our culture. And as we continue to grow that business, we'll look to either own teams in-house or have JV partnerships. So for example, we mentioned in the script, our recently signed joint venture with CAL Automotive, which is a multi-decade track record prime auto lessor and we set up a joint venture with them to effectively purchase and investment up to $1.5 billion in prime new vehicle leases that they originate.

So we've said this before, there are some people that are talking about origination as owning platforms, that's great. there are certain folks like us that are talking about owning teams that are employees of Ares where we see long-term sustainable origination opportunities. And then there are things in between where you may see something that's more tactical and you'll do it through some kind of a joint venture partnership.

Just to reiterate, we have over 70 investment professionals that are focusing on this market. We cover 30 different asset classes where we believe there is investable market and we have domain expertise, certain markets come in and out of favor. So it's important that the origination and the asset class capability is broad and diversified, but we have a lot of scale opportunity in that market and the team, as it's currently situated, can continue to grow at the pace that's been growing.

[Alexander Blostein, 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?

[Jarrod Phillips, executive]

Sure. Great to hear from you this morning. I'd go back to what we said at the Investor Day. And our primary focus is where are we investing in and how can we continue to grow? And sometimes that takes away from what our actual margin capability is because we could certainly increase the margin, but that would be at the cost of future investments.

And that's not what we want to be doing. However, we did say that as we deploy that margin will expand. And as I mentioned in the prepared remarks, we do expect year-over-year that you'll see a slight amount of margin expansion, and that will continue into 2025 and pace of deployment certainly helps with that.

And I think it will still be within that range of the 0 to 150 basis points that we laid out at Investor Day. And that's not including anything from GCP as we don't have an exact close date or anything of that nature. So that's just the standard what we have right now.

[Michael Arougheti, executive]

Alex, just doing the simple math, I think mentioning the distribution fees, if you excluded those, which are kind of obviously positive variance to the base case, given the growth in wealth, we would have scaled margin over 100 basis points if you back those out.

[Alexander Blostein, analyst]

No, I totally get it. It's a timing thing, and it's a worthwhile investment. Makes sense.

[Operator]

We'll take our next question from Steven Chubak with Wolfe Research.

[Unknown 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 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?

[Michael Arougheti, executive]

I would add 1/3, which is a really healthy economic backdrop and lower-than-expected defaults and losses in the market. So obviously, credit spreads on an absolute basis, they're going to be a reflection of first and foremost of people's perception of risk in the asset class.

And when you look at where the market stands, both traded and private, I think the default rate is significantly below historical averages. And when you look at some of the statistics that we're referencing in our portfolio around continued double-digit EBITDA growth, low loans to value, improving interest coverage that there's a general sentiment that despite the anxieties that people tried to put into the market 2 years ago, the performance has actually improved.

And so there's a general narrowing of credit spread. So I think it's important that people anchor on that as well and not just think about it in terms of supply/demand. Kipp did a really nice job, I thought, on the ARCC call talking about credit spread. And there is a durable credit spread in our opinion, between private credit and the traded markets.

We've been doing this now for 30 years, and that relative value moves around 150 to 400 basis points depending on where you are in the credit cycle and where the liquidity in the market is. And so again, I wouldn't read into it too much at this moment in time. But we do think that it's important that if you're going to pursue the most attractive relative value or the most attractive excess spread in the market, you have to be able to access every point of the market, and that's why we have been very focused in maintaining our leadership position in every part of the middle market, lower, core and upper because there are going to be moments in time where the BSL market is going to be more competitive with private credit unit tranche executions, you need to be able to move around the market in search of and that is a core differentiator for our platform. I do think you'll start to see that spread, if not gap out, at least normalize once we start to see normal M&A transaction values come back into the market.

[Unknown 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 down?

[Michael Arougheti, executive]

Yes, I do think that we expect Part 1 fees to continue to grow because the growth in absolute dollars will outpace the impact of spread compression. Again, as we've talked about, it's important to think about the components of return in these private credit instruments that are driving a lot of the Part 1 fees, right, you get upfront fees.

You have base rates, you have your credit spread. And so typically, rates will be going down in response to a weakening economic environment, which then typically correlates with credit spreads that are widening. And if reduced rates actually catalyze increased transaction activity, you tend to get more upfront fees. So it's not just linear that when rates go down, Part 1 fees go down because there are other components of return that actually come into play.

So it's -- again, it's important to understand how that works. When you look at the sensitivity and again, you can look at the ARCC disclosures in their queue, which represents a big chunk of part 1, but 100 basis point decline just linearly in interest rates would probably impact our FRE by $9 million per year.

So all else being equal, if you had a 100 basis point decline, we would lose $9 million, but then you'd obviously pick up a significant portion of that based on the dynamic I just talked about. So the rate picture is not really that much of a headwind to Part 1. And as you pointed out, not just ASIF, but the growth in other nontraded vehicles like our private markets fund and our European income fund, I think will outpace whatever headwind we face.

[Operator]

We'll take our next question from Bill Katz with TD Cowen.

[William Katz, analyst]

Commentary. So you had guided to sort of mid-80s maybe [indiscernible] 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?

[Michael Arougheti, executive]

Jarrod, do you want to take that one?

[Jarrod Phillips, executive]

Sure thing. So next year, in terms of our buildout and the fund raise, we will continue to have a number of different comingled products as well as the retail products. One of the things that Mike and I have talked a lot about with all of you is that we continue to raise the floor of our fundraising capabilities and a lot of that's come from the build-out of that retail channel that we've talked a little bit about on this call.

But we still have had large commingled fundraises that have had successive vintages above the prior vintage. I'd expect to see that continue to occur. And in the market next year, we'll have a number of different funds from strategies like our special opportunity strategy.

We'll continue to have our second climate infrastructure fund. We'll have various funds out of our secondaries group. We'll have a few funds out of our retail -- our real estate group as well. I do expect that with the real estate markets continuing to return, we'll see improved flows into things like the REITs.

So it's really platform-wide. I think we'll have a total of about 35 funds that will be in the market next year. And it won't be one dominant fund like SPL or ASIC like we had over the last couple of years. but it will be a number of different funds from across the platform, really broadening out the platform and coming from all different

[William Katz, analyst]

Okay. And just a follow-up. We're another 3 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 that's 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?

[Michael Arougheti, executive]

We're not. If you look at the last, call it, 3 to 5 years, I think there was more concentration in the channel, and so we've actually seen a broadening out of market share. We've obviously picked up considerable share, but it's actually been diversifying generally in the hands of the top players. The TAM here, as everyone has talked about, is quite significant. .

And I think that there are certain folks, ourselves being one of them, that are emerging as leaders just based on the investment that we've made in our distribution and servicing capability, the breadth of the product suite, the strength of the brand, the track record of performance.

So you will continue to see significant growth channel-wide and similar to what I talked about in the institutional private credit market, I think you'll continue to see concentration of market share in the hands of the platforms that were early and made the necessary investments to win.

[Operator]

We'll take our next question from Brennan Hawken with UBS.

[Brennan Hawken, 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?

[Michael Arougheti, executive]

So the distribution cost is fairly uniform across the industry. And so it's not as though Ares is having a different experience than our peer set. And again, I want to make sure that we don't really refer to this as a headwind because it's actually a pretty significant tailwind, and it's where you begin to see economies of scale. So if we pay an upfront distribution fee to raise permanent or semipermanent capital and those funds turn on management fee the day that the dollar is raised, there's a pretty quick absorption of that upfront fee.

And so as Jarrod said on the the prepared remarks, while we're experiencing it now as a "headwind" to our FRE margin, as we continue to scale you'll see faster and faster absorption of that as the management fees turn on for a broader number of products.

So we'll obviously have to keep highlighting this and talking about it so that people can kind of get their heads around it as we as we ramp. But it is uniform. We're experiencing what our peers are experiencing. And I don't expect that it will -- that we're going to see a meaningful change.

[Brennan Hawken, 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...

[Michael Arougheti, executive]

Got it. No, I don't think. I think the landscape is fairly well set as we talked about a little bit on the prepared remarks, there is a different market structure, for example, in the domestic wire houses versus the international channel and some of that mitigates. Obviously, what we have been doing is making sure that as we think about our compensation framework around these funds that were effectively recapturing the distribution expense before we're sharing the upside with the team.

So there's a lot that we do to make sure that we're focused on that absorption, but the international market functions differently. But in the U.S. market, again, it's pretty broad based, and I wouldn't expect it to bleed into other segments of the market.

[Brennan Hawken, 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 to 70 just from the Europeans? I know -- is the increase just purely from adding the American waterfall or did the European outlook improve as well?

[Jarrod Phillips, executive]

No, it's a [indiscernible]. It's pretty consistent European waterfall along with the add of incentive fees that we received at the end of the year that don't qualify as FRPR and then a little bit of American waterfall. So it's all those things going into the fourth quarter.

[Operator]

We'll take our next question from Michael Cyprys with Morgan Stanley.

[Michael Cyprys, 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?

[Michael Arougheti, executive]

Sure. So yes, October was our -- was a very, very strong month. We did $1.2 billion in equity in the month. It was across multiple products led by ASIF, but also really strong performance in ESIF, the new core infrastructure fund, and continued growth in private markets. So it was broad-based.

The core infrastructure fund, we're happy because it was launched quickly and seeded quickly with $400 million and is now in the market and building. And we have a pretty unique tax advantage structure there where we actually, just through the structure of that fund and the nature of the assets that we intend to invest in, believe that we could produce a 500 to 700 basis point premium to what you would typically get just in a nontax advantage core infrastructure.

So it's a nice core infrastructure exposure, but it has some really unique tax attributes that we think will be quite attractive to the the platform. Look, we continue to build the product suite as we talked about in the prepared remarks, we're working on a nontraded product around our sports media and entertainment practice.

We continue to systematically roll out products where we can meet the needs of our platform partners. And as the product set develops, we're obviously increasing and expanding our distribution relationships. So as we talked about, we're now on 60 distribution platforms, which is up 50% year-over-year, and that will, I would expect, continue to grow and diversify. So it's build a product set, expand your distribution and that's been the playbook, but it's been pretty rhythmic and then sequential in the way that we're doing it.

[Michael Cyprys, 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?

[Michael Arougheti, executive]

Sure. I think we have Bill and Julian. I don't know if they want to give some of their perspectives.

[Unknown Executive]

Sure. Happy to. We are seeing quarterly, over the year, a real pickup in activity, both in debt and equity. Our highest conviction themes have been for quite some time, industrial, both in the U.S. and in Europe and multifamily in those geographies. And we are seeing pickups in there, too. done some large hotel transactions in the U.K. and lending is pretty broad-based across product types.

So other than offices, and we're nibbling at some offices in London, it remains to be industrial, residential, student, single-family. Did our first retail deal in the U.S. in many, many years, very attractive shopping center in your Cape Cod. So that's a flavor of what we're seeing.

[Operator]

We'll take our next question from Brian Bedell with Deutsche Bank.

[Brian Bedell, 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 7% 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?

[Michael Arougheti, executive]

It is possible. And I'm glad you mentioned GCP. I think, given their capability and our ability to now offer more global product around industrial real estate and digital infrastructure, I think that our product capability is clearly going to grow and diversify. So that acquisition may get us to a point where we can be outside that range of 8 to 10.

At our Investor Day, we were at 6, we're now at 7. And as you said, we've got a couple in the pipeline. So we're kind of already there. That said, with the current product and the products in the pipeline, it does project a portfolio of products that gives the investor access to pretty much everything that we do here. So we may not be as active in bringing new product. I can't quite comment on that until we get to the point where we've kind of got these products in the market, and we know what that looks like.

In terms of the first part. Again, I don't think that our view has changed. We are growing in line with the commentary that we made at the Investor Day, if not slightly ahead. And it's important that you're covering every part of the market, domestic and international, in order to achieve those objectives.

So obviously, the largest part of the market is in the wirehouse platforms, but the fastest-growing part of the market is in the RIAs. And so you have to be thinking about it in terms of where do you see rapid growth, but then where do you also see scale? And I think you have to go after both of them.

[Operator]

We'll take our next question from Ken Worthington with JPMorgan.

[Kenneth Worthington, 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 their platforms, are we still in this all-you-can-eat buffet environment?

[Michael Arougheti, executive]

I think it is getting more sophisticated. And as I mentioned, I think it's getting more concentrated in the handful of a number of brands that can support the continuing education of the large platforms. And so I don't think it is all-you-can-eat. I think it's been very intentional in building out the outcomes around durable yield and diversified equity and tax.

And so there's an intentionality as to the products that we're creating. That's a push and a pull in collaboration with the platforms. And I think you're seeing a reduced number of managers that are getting the access points. And again, I would expect that to continue.

In terms of the distribution, the cost of distribution, again, I want to highlight the cost of distribution on a per dollar basis for us is actually going down in the channel as we scale. So there is meaningful economies of scale in our distribution platform just based on the number of people we have and what the capability and capacity is.

And so while we're all here focusing on absolute dollars, if you think about cost per dollar raise, we're actually seeing meaningful decreases in the cost per dollar raised in terms of our own lift experience relative to what it was a year ago.

[Kenneth Worthington, 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?

[Michael Arougheti, executive]

Yes. I don't -- it does lag. So you first have to think about, at least in the private equity, there is a lag effect. So when we're talking about Q3 returns in secondaries. You are really talking about Q2 numbers. And then maybe without getting into all of the nuances of how secondary returns roll through funds, oftentimes, if you're buying discounted portfolios, you pull return forward and then give return back over the life of the fund.

So it's always more relevant to look at inception-to-date return as opposed to quarter-over-quarter return when you're looking at secondaries? And so when you look at the inception to date returns broadly speaking, across that family of funds, they're doing what they're supposed to do.

[Operator]

We'll take our last question from Mike Brown with Wells Fargo Securities.

[Michael Brown, analyst]

Great. Thanks for squeezing me in here. I guess maybe another follow-up on the wealth market. We've seen some gainable 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?

[Michael Arougheti, executive]

I think the simple answer at least with regard to which is our diversified credit fund. That is -- it is already scaled with a 5-year track record and it offers diversified credit exposure, both liquid and illiquid. And so I do think that we have a running head start there, and we can continue to expand distribution.

With regard to a lot of the announced partnerships, and we're beginning to obviously see some detail on what the product set is, and we talked about this on the last call, you have to really think about those products from the angle of, will it enhance distribution, number one?

And number two, will it enhance the client experience in terms of the product that they can invest in and/or the returns that they can get? And so I think if we were to look at partnerships like the ones that others have announced, we would have to be convinced that we're getting access to points of distribution that are accretive and additive to what we currently have and that it will meaningfully change the investment performance or the customer experience relative to what they have now.

And at least today, and we've had discussions with many potential partners, given our product set and our capability in liquid and illiquid credit, right, we have a very large liquid credit business, where we're able to offer access to the broadly syndicated loan market, the high-yield market, the rated ABS market, so until we convince ourselves that there is a portion of the fixed income market that we can't deliver to the client ourselves or that the client absolutely wants to access that part of the market package with private credit, we're probably going to be a little bit slower to move there.

But obviously, it's noteworthy, but I appreciate you bringing up our fund because while there's a lot of talk about how novel this product is, we've been running this product at scale for quite some time and obviously have a pretty significant track record of performance there.

[Michael Brown, 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?

[Jarrod Phillips, executive]

Sure. This quarter here, the alternative credit product open-ended that we had, that has a little bit different comp ratio at 70-30. So that's why you saw that this quarter. But I'd remind you that, that fund also has a charitable tie-in. So 5% of that overall amount is donated to various charities.

So it's pretty positive influence on what we're doing and it's pretty innovative for that team to do that as well because part of it's coming out of their allocation. Looking forward at Q4, one of the reasons that, that comp ratio is a little bit different is that you have European funds that are in there as well.

And the European funds have a different tax structure in terms of how those are taxed, so there's different employer taxes that are born as a result. So that's what throws off your comp ratios a little bit and we typically guide that it's going to be somewhere in the mid-30s.

[Operator]

And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

[Michael Arougheti, executive]

No, we have none. We appreciate everybody spending so much time with us today and all the great questions and continued support, and we look forward to speaking to you by next quarter. Thank you.

[Operator]

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the call will be available through December 1, 2024, to domestic callers by dialing 1-800-839-5241 and to international callers by dialing 1 [phone]. An archived replay will also be available through December 1, 2024, on a webcast link located on the house page of the Investor Resources section of our website. Goodbye.