Ares Management Corp
NYSE:ARES
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Ares Management Corp
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Welcome to Ares Management Corporation's Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Friday, February 11, 2022.
I will now turn the call over to Carl Drake, Head of Public Markets Investor Relations for Ares Management.
Good afternoon, and thank you for joining us today for our fourth quarter and year-end 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 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.
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 fourth quarter and full year 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 first quarter dividend of $0.61 per share of its Class A and nonvoting common stock, representing an increase of 30% over the same quarter a year ago. The dividend will be paid on March 31, 2022, to holders of record on March 17.
Now I will turn the call over to Michael Arougheti, who will start with some quarterly and year-end financial and business highlights.
Thank you, Carl, and good afternoon, everyone. I hope everybody is doing well. Our strong fourth quarter results capped off a transformational year here at Ares. We generated record results across nearly every key financial metric. We saw tremendous growth across our global platform and our best fund performance since we became a public company.
As we outlined at our Investor Day last year, we are operating in expansive and rapidly growing end markets, and we're gaining share through our scale, product and geographic expansion and new distribution. We believe that our global platform and our unique culture of collaboration and innovation are key drivers of our firm’s success.
We ended the year exceeding $300 billion in AUM, 55% higher than the near $200 billion in AUM at the end of 2020. The vast majority of this AUM growth was organic and driven by a record $77 billion in gross fundraising, including $25 billion in the fourth quarter alone, well ahead of our expectations. Our strong organic growth, which we believe to be among the best in our industry over the past 3 years, reflects our investor satisfaction with our fund performance and the continued expansion of our capabilities and strategies.
On top of the strong organic growth, we added $33 billion in AUM from the strategic acquisitions of Landmark Partners and Black Creek Group. These businesses are performing very well and have positioned us for significant future growth across an increasingly diversified set of strategies. We're already seeing exciting revenue and earnings synergies with Black Creek and Landmark under our ownership as we collaborate to positively impact fundraising, investing and fund performance.
In addition, in December, we agreed to acquire AMP's Infrastructure Debt platform, which is one of the largest global infrastructure debt platforms with approximately $8 billion of AUM and with a strong and long-term investment track record. We were pleased to announce the closing of this transaction last night, and we're excited with the extraordinary support that we received from the Infrastructure Debt platform’s existing LPs.
The addition of the infra-debt team will expand our investment capabilities across the digital, utilities and transportation sectors and will enhance our existing capabilities in the renewable energy space.
The growing scale and breadth of our investment capabilities were on full display as we invested more than $80 billion for the full year across more than 25 different strategies around the globe. Our deployment, record fundraising and 2 strategic acquisitions all helped drive a nearly 50% year-over-year increase in our fee paying AUM and a 65% increase in our full year fee-related earnings which accounted for more than 80% of our realized income.
Our FRE margins continued to expand throughout '21, approaching 40% in the fourth quarter, an improvement of over 250 basis points year-on-year. And over the past 5 years, our FRE margins have now expanded by more than 1,200 basis points.
Our prospects for continued growth across all 5 of our business groups remain bright. With $90 billion of available capital to invest and a robust fundraising pipeline, we have strong visibility for continued growth in earnings over the coming years. Given our high conviction on our outlook, we're increasing our quarterly dividend by 30%, as Carl stated. This conviction is supported by a promising long-term view on the secular growth in alternative investments as institutional, retail and insurance investors are all seeking differentiated sources of income with less market volatility. Each of these channels is expected to support the double-digit annual market growth in the alternative asset sector over the next 5 years as alternatives continue to take share from the global pool of hundreds of trillions of dollars of investment assets available. Inflation concerns and expectations for higher rates have no doubt generated some recent market volatility.
In the past, we've demonstrated our ability to achieve significant growth even through volatile periods like the global financial crisis and the recent COVID pandemic. We've also effectively navigated interest rate volatility in past cycles, and we continue to believe that Ares is well positioned given the generally floating rate nature of our credit assets, the growth orientation of our private equity portfolios and the inflation protection inherent in our real asset book.
We continue to see investors consolidating their manager relationships with broader platforms to gain efficiencies and strategic insight. To that point, over 80% of our direct institutional fundraising in 2021 was derived from existing investors, either reupping into one of our existing strategies, which accounted for 45% of direct institutional fundraising, or investing in other Ares strategies across our platform, which accounted for 39% of direct institutional fundraising.
Today, 62% of our institutional direct AUM is from clients that are invested across our platform in 2 or more investment groups, up from 49% of our clients 5 years ago. We also continue to attract new investors onto the platform. Out of the total 427 direct institutional investors who committed to new funds in '21, 41% of them were new to Ares. Our goal is to bring new investors onto the platform, deliver a best-in-class experience and performance and then earn additional trust and wallet share in subsequent fund offerings. We saw this play out in 2021 as the average investment size for existing investors increased 35% year-over-year and was over 3x as large as the average investment size for new investors.
This increasing momentum with our investors culminated in a record fourth quarter fundraising with more than $25 billion of capital raised. This included $3.7 billion for the final close of our second senior direct lending fund, SDL II, bringing total fund commitments to approximately $14 billion, including leveraged and unleveraged sleeves. We believe this single fund is one of the largest ever private funds raised in the U.S. direct lending market.
We held a final close for our inaugural Climate Infrastructure Fund, ASIP, raising $1.2 billion in the quarter and bringing total commitments to $2.2 billion, including related vehicles. Investing in renewables through the energy transition remains a significant focus and a great opportunity for us in the future.
We also closed on commitments for several newly launched vintages of existing funds. In our second special opportunities fund, we raised $4.9 billion in the fourth quarter and are well on our way to the hard cap of $6 billion. In our secondaries business, we raised nearly $800 million of initial commitments following the launch of our ninth Landmark Real Estate secondaries fund. And in Asia, Ares SSG raised over $800 million of initial commitments following the launch of our sixth Special Situations Fund.
We also continue to experience significant fundraising momentum in our Perpetual Capital Funds with more than $5 billion raised in the fourth quarter, including $3 billion raised in the retail channel and $2 billion in the institutional open-ended channel.
Our 2 nontraded REITs and the institutional open-end industrial Real Estate Fund that we acquired from Black Creek are all running well ahead of our expectations with more than $2 billion raised in Q4.
So looking back over 2021, our record $77 billion of fundraising far exceeded 2020's record of $41 billion. During the year, we held final or meaningful closings on over a dozen flagship funds totaling nearly $35 billion. Interestingly, our flagship funds that held a final closing in 2021 increased their committed equity by approximately 50% in the aggregate over prior vintages, highlighting the embedded growth potential that we have from scaling existing funds.
But even with an impressive year in flagship fundraising, we raised more funds outside of our flagship commingled products, including $21 billion in our perpetual capital vehicles, which now represent over 25% of total AUM. We're seeing accelerated growth across our various distribution channels, particularly in retail and insurance. While aggregate fundraising increased 86% year-over-year, fundraising in our retail channel increased over 150% year-over-year to $14.5 billion. And AUM from our retail and high net worth channel stood at more than $50 billion at year-end.
Fundraising from insurance clients increased over 100% to $11.7 billion as we continue to develop products and expand our client service teams to target these investors.
In the retail channel, the formation of Ares Wealth Management Solutions is enhancing our ability to drive additional flows into our existing funds and has now positioned us to launch new Perpetual Capital Funds. We are rebranding the Black Creek Funds, including the Diversified Property Fund, which is now Ares Real Estate Income Trust, or AREIT, and Black Creek industrial REIT 4, which is in the process of being rebranded as the Ares Industrial Real Estate Income Trust.
Our Ares Wealth Management Solutions team is also actively working to expand product distribution with wirehouses, regional broker-dealers and RIAs in the U.S., Europe and Asia. In late '21, our insurance affiliate, Aspida, completed the acquisition of an additional insurance company, enabling Aspida to begin writing new annuity and insurance contracts, which is expected to begin late in the second quarter of this year. While there will be a ramp-up period, we expect to see stronger growth in Aspida over time as our organic sales organization will complement our reinsurance flow arrangements and potential block acquisitions.
At year-end, Aspida had $3.4 billion of assets managed by Ares Insurance Solutions with more than 40% sub-advised across the Ares platform. Looking forward to 2022, we expect to have more than 25 different funds in the market, including the launch of some new fund strategies. We now have 23 commingled fund series that have closed on $1 billion or more in their latest fund vintage. This is up over 4.5x from only 5 fund series in 2016. And while we expect another strong year of fundraising in 2022, we don't expect to approach our 2021 record, particularly given the record amount of available capital that we have to invest.
Our global origination footprint and increased scale is enabling us to invest in larger transactions across more geographies and across broader strategies. In addition, the private markets continue to scale which has created an opportunity to serve larger companies and sponsors as the global markets expand and evolve across the waterfront in direct lending, alternative credit, real estate credit infrastructure credit and special situations among others. So as these markets go through transformational change, we feel confident that we're gaining share and addressing investor needs with flexible solutions.
For the fourth quarter, we had gross capital deployment of $32 billion, another record quarter and nearly double the $17.3 billion of gross deployment in Q4 2020. For the full year, we deployed over $80 billion in flexible capital with an emphasis on industries and assets that are cycle resilient like health care, software and technology, business services and other service industries on the corporate side, industrial and multifamily properties in real estate and renewable energy within infrastructure.
Of note, we invested more than $48 billion in our U.S. and European direct lending and alternative credit strategies during the year. Our full year fund performance across every investment group was some of the strongest that we've experienced as a public company. Private equity returns in both our Ares Core of our Opportunities fund series and Special Opportunities Fund were excellent and meaningfully outperformed the broader U.S. equity market indices. Our ACOF composite generated gross returns of 7.5% in the fourth quarter and 52.6% for the full year, while Ares Special Opportunities generated gross returns of 4.5% in the quarter and 45.9% for the full year.
Real estate continued its outstanding performance as the U.S. real estate equity composite generated gross returns in the fourth quarter of 10.7% and 62.3% for the full year, and our European real estate equity composite had gross returns of 5.8% in the quarter and 34.2% for the full year. In our non-traded REITs, for the full year, Black Creek Industrial REIT 4 delivered a net return of 29.7% for its Class I shares and AREIT generated a 13.8% net return for Class I shares.
Our secondary strategy kept pace with strong performance across the board. The private equity secondary strategy, which reports results on a 1-quarter lag basis, generated gross returns of 13.9% for the quarter and 60% for the trailing 12-month period, while real estate secondaries generated gross returns of 18.7% for the quarter and 49.7% over the trailing 12 months on a 1-quarter lag basis.
Pathfinder, which is our flagship alternative credit fund, has generated a very strong net IRR of 49% since its inception in 2020. What makes this performance particularly exciting is that 10% of the incentive fee income from this fund has been donated by the portfolio managers and by Ares to support charitable initiatives such as global poverty, health and education.
Our flagship U.S. direct lending fund, Ares Capital Corporation, generated strong net returns of 4.6% in the fourth quarter and 22% for the year. Our European direct lending strategy generated gross returns of 2.5% for the quarter and 14.5% for the year. In liquid credit, our syndicated loan and high-yield bond composites generated gross returns of 6.3% and 6.9% for the year, respectively, outperforming their respective benchmarks by 15% and 29%.
Our flagship global multi-asset credit strategy also generated a gross return of 12.8% for the year.
And lastly, in Asia, our Special Situations Fund Composite, generated a gross return of 6.8% in the quarter and 30.2% for the full year. Hopefully, these returns illustrate that we have highly talented, motivated people driving differentiated investment outcomes for our clients across all of our strategies and highlight why we continue to enjoy a sticky and growing client base.
And with that, now let me turn the call over to Jared to walk through the fourth quarter and the full year financial results. Jarrod?
Thanks, Mike. Hello, everyone, and thank you for joining us to discuss yet another great year for Ares. I'll start with a review of the fourth quarter and the full year, and then I'll provide an update on our outlook. As Mike stated, we experienced impressive growth in nearly every financial metric, including management fees, fee-related earnings, realized income, AUM, FPAUM and net accrued performance income for both the fourth quarter and the full year.
In 2021, we demonstrated not only the power of our existing platform, but the ability to execute on acquisitions further adding to our competitive advantage and scope. We also began to showcase the earnings power of our perpetual capital vehicles, which contributed significantly to our fourth quarter.
On that last point, I would like to highlight that our revenues in FRE now include the addition of fee-related performance revenues, or FRPR, for the fourth quarter and full year. FRPR refers to recurring performance revenues derived from perpetual capital funds that are not dependent on realizations and typically are measured and crystallized annually in the fourth quarter. This better aligns with reporting by our peers who operate funds with similar fees, including nontraded REITs and other evergreen fund structures.
Starting with our revenues. Our management fee increased 44% for the fourth quarter and 38% for the full year, driven primarily by the strong deployment of our invested capital, as Mike highlighted. In addition, another $18 billion of AUM in funds raised during the year became fee pay. Our management fee stability is a key differentiator for our business model and allows us to better manage market dislocation.
As of year-end, 95% of our management fees came from either perpetual capital or long-dated funds, greatly reducing the risk of redemptions even during severe market movements. With deployment accelerating means we scale our strategies, we believe that we remain very well positioned to continue this growth.
Other fee income increased to approximately $22.4 million for the fourth quarter and $50 million for 2021, up 219% and 150%, respectively. This sharp increase is primarily due to the Black Creek acquisition, which in addition to management fees, FRP and realized performance income generates development, leasing and acquisition fees, which are recorded in other fee income. Our other fees also include our capital structuring and origination fees in certain of our direct lending perpetual funds.
For the full year 2021, we had $137.9 million of FRPR compared to only $23 million for the full year 2020. Strong contribution from FRPR in 2021, of which about 98% came in the fourth quarter, was primarily driven by a significant ramp and strong performance in our U.S. and European direct lending perpetual managed accounts, which contributed over $85 million and the addition of 2 Black Creek nontraded REITs that collectively contributed over $48 million.
Of note, since we closed the acquisition of Black Creek on July 1, 2021, we only received our proportionate share of the FRPR from the 2 nontraded REITs during our ownership in 2021, or approximately 50% of the contractual annual performance revenues. For 2022 and beyond, we would receive the full year payout of such fees. Note that our FRPR, net of related compensation, contributed $51 million to our 2021 FRE compared to only $6.8 million in 2020. Based on the nature of these funds as described, we would not expect to see meaningful FRPR until the fourth quarter of 2022.
For the fourth quarter, FRE totaled $253.3 million, an increase of 85% from the fourth quarter of 2020. For the year ended December 31, 2021, FRE totaled $712.3 million, an increase of approximately 65% from the prior year, and it accounted for more than 80% of our realized income, up from 74% in 2020.
Our FRE margin for the year ended December 31, 2021, was 39%. And for the fourth quarter, totaled 39.7%. This represents a 400 basis point increase in our full year margin as compared to the full year 2020.
As expected, our realization activity picked back up in the fourth quarter, particularly within our Credit and Real Estate Groups. Our Credit Group generated $45 million in net realized performance income, which was nearly 2.5x the fourth quarter of 2020. This included performance income from our U.S. and European direct lending strategies and $10 million in net ARCC Part 2 capital gains fees.
Real estate net realized performance income also increased over 2.5x fourth quarter 2020, driven by strong results in monetizations in U.S. real estate equity funds, including Black Creek's institutional funds. Overall, net realized performance income for the fourth quarter increased 49% year-over-year and full year results were up 17% versus the prior year.
Realized income for the fourth quarter totaled a record $340.3 million, up over 80% from the fourth quarter of 2020 and over 60% higher than our previous record. For the full year, realized income totaled $882.9 million, a 52% increase from 2020. After-tax realized income per share of Class A common stock was $0.85 for the fourth quarter, up from $0.54 in the fourth quarter of 2020 and full year 2020 after-tax realized income of $2.57 per share of Class A stock was up 38% versus 2020.
At the beginning of each year, we look to set our quarterly dividend at a fixed level for the coming year. Based on the significant outperformance of our fee-related earnings relative to our dividends and our continued strong growth prospects, we've elected to increase our quarterly dividend to $0.61 per share of Class A stock or $2.44 annually, up 30% from the $1.88 per share for 2021. This 30% growth for 2022 is ahead of the 20%-plus long-term cumulative annual growth rate guidance we gave at our Investor Day last August.
We believe it is appropriate given our strong visibility from our significant dry powder for deployment, fundraising pipeline and full year accretion from our Black Creek and Landmark acquisitions.
As of year-end, our AUM totaled $306 billion compared to $282 billion for the third quarter and $197 billion as of the year ended 2020, this represents a 55% increase year-over-year and our highest annual AUM growth rate as a public company. The main drivers of this increase in 2021 included $77 billion in gross new capital commitments as well as $33 billion from strategic acquisitions completed in the year. Our fee-paying AUM totaled $188 billion at year-end, an increase of approximately 9% from the third quarter and nearly 50% from year-end 2020.
Our growth in fee-paying AUM was primarily driven by meaningful deployment in our global direct lending, special opportunities and alternative credit strategies, which are paid on invested capital along with $30 billion in fee-paying AUM from Landmark and Black Creek.
With market volatility rising as we enter 2022, we stand ready to take advantage of any opportunities that may arise based on our record levels of available capital and AUM not yet earning fees. Our available capital increased to a new record high of $90.4 billion, an increase of over 61% year-over-year, primarily driven by fundraising in our direct lending and special opportunity strategies. In addition, we ended the year with $53 billion of AUM not yet paying fees available for future deployment. Approximately 75% of this balance is housed in our credit strategy, including over $32 billion in direct lending and $7 billion in alternative credit.
Our incentive eligible AUM increased by 56% from the year-end of 2020 to $183 billion. Of this amount, $70.4 billion was uninvested at year-end. In the fourth quarter, we continued to experience appreciation in our net accrued performance income balance, which now sits at $808 million. This represents a 10% increase from the third quarter and 130% increase from the end of 2020. Of this $808 million of net accrued performance income at year-end, approximately 60% was in European-style waterfall funds.
As we highlighted at our Investor Day in August, we have a substantial and growing balance of European-style waterfall funds, that accrued performance fees but pay most of their performance fees in the final years of the fund life. In 2022 and ramping up thereafter, we expect to see an increase in these realized performance fees from older vintage European style funds as they mature. As we continue to raise additional European style funds, the base of future performance income should continue to increase.
In fact, we have raised an additional $20.5 billion of European waterfall style funds that were not incorporated into our forecast from Investor Day.
From an organizational standpoint, we plan to reorient our reporting segments to better align with our platform expansion. Following the closing of our Infrastructure Debt acquisition, we will combine our real estate group with our newly expanded Infrastructure Debt and Equity platform. This combination will create a new real assets group reporting segment.
On an as-adjusted basis, this new group would have total AUM of $53.9 billion and FPAUM of $33.4 billion at year-end, which includes our existing real estate strategies, $4.8 billion in AUM and $4.5 billion in FPAUM from infrastructure and power that currently resides in private equity and approximately $8 billion of AUM and $5 billion of FPAUM from the Infrastructure Debt platform acquisition.
Before I turn the call back to Mike, let me touch on our forward outlook. As you will recall, we gave investors some longer-term guidance at our Investor Day last August. We continue to believe we are on track to reach our $500 billion plus AUM target by 2025, and our 20% or more compound annual growth in FRE, and our 20% or more compound annual growth in our dividend per share of Class A common stock through 2025.
Lastly, we continue to expect to reach our goal of a 45%-plus FRE run rate margin by 2025. With significant headcount growth planned in 2022 to meet our longer-term AUM target, we expect our FRE margin expansion will moderate this year.
This was truly a momentous year for our firm with many transformative developments and record results across the board.
I'll now turn the call back over to Mike for his thoughts and concluding remarks.
Thanks, Jarrod. Based on the foundation that's already been laid with our investment teams, our fundraising pipeline and our current available capital, we have good visibility that the next several years are going to be quite strong for our business. In addition, the synergies and earnings contributions from our recent acquisitions in the aggregate are running ahead of our expectations and we expect these trends to continue. That said, we will continue to invest to expand and enhance our core businesses, higher investment talent and grow our business development, Investor Relations and noninvestment support in order to maintain strong growth in the years ahead.
We'll also be continuing to add to our ESG and DEI team as we continue to focus on our impact at Ares and integrate our ESG values across every aspect of our firm. We believe that this makes us a stronger more cohesive workforce, better investors and allows us to strive to make a positive impact for all of our stakeholders.
As it relates to potential new acquisitions, the strategic transactions announced in 2021 filled specific product gaps in areas that we identified as high-growth opportunities. Our product breadth and scaled operations provide us a significant platform from which to build businesses organically, and as a result, the bar for new M&A is higher. We expect to be active in the organic build-out of products across each of our business lines, including optimizing the synergy opportunities in our recent acquisitions that will hopefully further enhance our growth.
I want to end just by expressing how impressed by, proud of and grateful for all of the hard work and dedication of our team, how grateful I am for everything they're doing every day to deliver for our stakeholders. I'm also deeply appreciative of all of our investors' continuing support for our company, and thank you for the time today.
And operator, with that, could you please open up the line for questions?
[Operator Instructions]. Our first question will come from Craig Siegenthaler with Bank of America Securities.
So I want to start with Black Creek. It was nice to see its third place finish in the fundraising league table last year, but I wanted to see if you could comment on your ability to get the private REIT on more distribution platforms and really leverage your larger network effect and cross-sell into more intermediary channels? And also how this could potentially impact fundraising year-over-year?
Yes, it's a good question. Obviously, that's part of the core investment thesis for the acquisition is to leverage the client service organization that already exists into a broader set of relationships, both in the U.S. but also in Europe and Asia. We're far along on that. We're having productive conversations with a number of other platforms.
I think the good news there is our interval fund, CADEX, which is also enjoying good growth in the channel is already on multiple platforms given our traded vehicles. We have very strong brand awareness within those channels and platforms and relationships with the adviser community. And through our high net worth sales effort, there's great familiarity with the product set up and down The Street. So we're working on it. I'm optimistic that we'll continue to make headway there. And obviously, as we add new platforms, and build it out, it should have a pretty meaningful impact on fundraising. I'd also maybe articulate for those that don't know, if you really look at the growth in the channel as important as it is to be on the wires and grow, the RIA channel is actually growing at a faster pace and represents as significant as an opportunity, and that's a place where we've already had some pretty meaningful success.
And then, Michael, just as my follow-up, you hit on the trade vehicles, but speaking on ARCC for a moment. You have a huge public BDC. You have a huge private credit origination business. Why not launch a private BDC to supplement the public BDC in your existing business?
Yes. It's a good question. We think that the nontraded BDC product is a really interesting product. And as you've seen us do across the platform over time is we're constantly looking for ways to grow and diversify our funding sources. It's not lost on us just what the appetite for those types of strategies are in the growing nontraded channel.
Our next question will come from Alex Blostein with Goldman Sachs.
I wanted to start maybe with a question around deployment dynamics for Ares. You guys had a record year in deployment last year. Obviously, the environment has gotten a little bit more bumpy to start 2022. So how are you thinking about deployment opportunities as a whole? Obviously, a lot of the direct lending business is predicated on financial hunters being active. Are you seeing any signs of that activity slow down? And if you do, maybe you could expand on what are the things you guys are doing to expand into non-sponsored based part of the market?
So a general comment on deployment. Obviously, a driver of deployment is in our private credit strategy. So I'll make sure that we talk about that specifically. But hopefully, it's not lost on people that one of the reasons why we are driving the levels of deployment that we are is just the investments that we continue to make in expanding our global origination footprint and broadening out our capability set. So while the private credit markets continue to be a big driver of that, when you look broadly across the platform, there's a very diversified mix to where we're deploying both from an asset class and geographical perspective.
And I think importantly, when you look at the mix of product, we're able to deploy and generate return regardless of the market backdrop. With regard to private credit specifically, and Kipp touched on this a little bit on the ARCC earnings call, 2021 was a very strong year of deployment. Some of that is a function of kind of call it post-COVID rebound and just some pent-up transaction demand coming out of the lockdown, and some of it was probably a little bit tax driven. I think it's too early to tell as we sit here in February as to what 2022 will hold. I'd remind people that private credit flows tend to be a little seasonal. If you look over our history, Q4 and Q2 tend to be significant deployment quarters relative to a summer slowdown and a little bit of a lull that we typically see at the beginning of the year. So it's hard to say if there's a loan now that's seasonal or as Kipp articulated on the BDC earnings call, there's just a little bit of a pause as people are price discovering given the rate backdrop.
I would not though discount the power and weight of dry powder that exists in the market across the institutional, corporate and real asset equity space and what that really means for more consistent transaction volumes.
You had a question with regard to -- there's 1 last question, I missed about private.
So yes, yes, the non-sponsor, right. So the predominant portion of the business, I think it's sponsor-led. So just curious how you’re thinking about expanding there?
Yes. So we have a very significant non-sponsored business that's geared direct to corporates and organized by industry, where we have teams that are focused on health care and life sciences lending, sports, media and entertainment lending, consumer and retail. And that's been a growing part of our deployment. When you look at it in dollar terms, it's significant, particularly relative to the peers when you look at it as percentage terms, it just can't ever really move the needle given the market position that we have in the sponsor side of the business. So we are making investments there on the corporate side. It is bearing significant fruit and I expect to see that grow.
And then obviously, when you look at where growth is coming away from corporates, our infrastructure debt businesses, our real estate lending businesses, our alternative credit businesses are also a healthy mix of sponsor and non-sponsored and we're pretty active there as well.
Great. Second question, just around the numbers. I wanted to begin a little bit more to the performance fees that are now sitting within FRE. You guys gave a little bit of color on kind of why you decided to go down the path, that makes sense. I was hoping to maybe get a couple of underwriting drivers behind it, so what's kind of the right asset base we should be thinking about within credit, in particular, that will drive this, I guess, every Q4? What's the hurdle rate that we should be thinking about? And just broadly speaking, kind of how do you think about the consistency of the growth in these perpetual SMA vehicles and credit that will -- sounds like these are of additional piece we’re able to [indiscernible]
Sure, Alex. Thanks. And it's really 2 pieces that you laid out. It's about 2/3 of what we recorded in the credit side and about 1/3 over in the real estate side on the nontraded REITs. In terms of the credit where you asked the question, that has been a growing part of our portfolio and the perpetual capital resulting from those SMAs has grown pretty significantly over the last few years, and this is the first time that this really became a material component. And as I mentioned in the prepared remarks, it was something that we wanted to make sure was in line with how our peers were reporting. Those are standard incentive fee type arrangements where they're earned and crystallized on an annual basis based on unrealized and interest income and realizations would be included in there, too, but it is not dependent on those realizations, like carried interest would be. And so every year, as we reach the end of the year, that's the typical time when they're going to crystallize, they'll be measured against that hurdle, which is going to be in that 6% to 8% range. We've continued to see growth in those SMAs for that product, both in U.S. and Europe.
And as we continue to have a larger growth that we will hopefully see more in that line item as well. And the other thing I'd add is that these are all primarily illiquid. So these aren't liquid assets that underlie these perpetual capital vehicles, they are illiquid direct lending loans.
Our next question will come from Michael Cyprys with Morgan Stanley.
Maybe just following up on Alex's question there on the non-sponsor side. You mentioned that it's significant in dollar term, just hoping you could help quantify that. And you mentioned that it can't necessarily move the needle today given your position on the sponsor side. But I guess as you look out over the next 5 to 10 years, what are your ambitions and aspirations on the non-sponsor side? Where would you like that to be in terms of your ideal mix of the business? And maybe you could talk about some of the initiatives that you have going on there as you think about executing on that.
Sure. Thanks, Michael. So again, not being a needle mover, maybe that's subjective, so I'm glad you kind of asked about the quantification, but just to zoom out quickly. We have to make sure that when we're talking about private credit and direct lending that we include all of our private credit businesses, which are all in growth mode. And so when we look at private credit. Yes, there's the corporate piece that's germane to your question, but meaningful business in real estate lending, that's now in expansion mode geographically and from a product set, infrastructure, debt and obviously, with the addition of our new partners at AMP, new growth opportunity. Asian direct lending and special sits so on and so forth. So those businesses tend to be less sponsor-driven and more direct to company. So I want to make sure that as people are thinking about non-sponsored deployment that, that at least factors into the conversation.
If you were to narrow the focus and just say in the core direct lending to corporates business, right now, non-sponsored flow represents about 10% of our deployment. So call it, $3 billion to $4 billion, and that has been growing year-over-year. The types of investments we're making, as I said, and I'll just restate them, software and technology, life sciences and health care, sports, media and entertainment, consumer retail, there are dedicated teams that work hand-in-hand with the sponsor groups to originate into the direct to corporate, but also to support from an industry and subject matter expertise standpoint. So it's a twofold benefit in building out those direct-to-company industry teams.
And just any sense on overall AUM, would you say, in the non-sponsor side today? And as you think about the mix, where would you like that to be kind of looking out longer term for the business?
I don't actually have access to the number. We could take that offline and find it for you. I don't -- and I'll ask you if there's something that you'd like to get at in terms of a view on the value of non-sponsored flow versus sponsored flow?
I think our teams would generally say they're agnostic. There comes different risks and different return, whether you're making a sponsor-backed loan or a loan direct to a corporate and that always gets factored into how we price and structure those investments. There's obviously value in developing deep corporate relationships directly and surrounding those relationships with a broader product set across our entire platform. But it's not as though we go into any given year and say, the stated goal is to deploy X into sponsored and X into -- Y into non-sponsored. So if there's something that you're trying to get at in terms of some trends you're seeing or value perception of non-sponsored versus sponsored, happy to clarify.
Sure. Maybe it kind of gets to any sort of -- I'd be curious your views on perceptions around the cyclicality of the sponsor side relative to the non-sponsor, just given the dependence on private equity deployment and trends there? And also any sort of views on probability of default and recovery values. So those 2 different sides of the private credit business.
Got it. Yes. So I believe, personally, and we've been, I'd say, at the forefront of the development of the direct lending market now for almost 30 years. I don't -- I believe that cyclicality in the sponsored lending market is reducing year-over-year. That's a function of just the evolution and maturation of that market. There are more sponsors and more markets with more dry powder that are actively looking for private market solutions. And so I think you'll see volatility in that market reducing over time as the market continues to evolve and mature.
I personally, based on my own experience, would say that the risk of default or maybe the risk of loss given default is higher in the non-sponsored space. And one of the big benefits of lending into the institutional equity community, whether it's for real assets or corporates is the amount of dry powder that's there could be diverted to provide credit support. And we saw that play out in spades across the entire private credit book here through 2020 and 2021 as the equity owners stepped up to support their companies in a way that non-sponsored owners sometimes can't.
In terms of volume, if you look at just sheer corporate direct lending volume in the U.S., we looked at $500 billion of transaction volume in 2021 in our U.S. business. So the market is growing. It's increasing. There are more transactions, more line items. And so I don't perceive it to be as sick with coal may be as we would have told you it was 20 years ago.
Our next question will come from Gerry O'Hara with Jefferies.
Mike, maybe picking up a little bit on your comments around M&A and kind of focusing on, obviously, what's at hand, but also kind of appreciating a higher bar. Just curious if you do still see some gaps in the lineup? Clearly a much more diversified business now than you were 3, 5 years ago. But curious to just sort of get your thoughts on what that landscape might look like with -- even with that higher bar.
Yes. Thanks, Gerry. So if you go back and look at some of the things we talked about at our Investor Day, the acquisitions that we're attracted to tend to be in high-growth markets and asset classes where we have a little bit of a sense of urgency to participate in that growth, but making these acquisitions with a very high conviction that we can then organically grow them. So once these acquisitions come online here and get integrated, they become high-growth organic growth stories for us, and you can begin to see that playing out in each of our acquired businesses. So now given how active we've been, we now have lots more growth engines organically, not just in our core legacy businesses, but some of the organic businesses as well. And as financially attractive and accretive as these acquisitions have been given where we're able to buy them, obviously, we can generate very high ROEs through organic expansion.
As I sit here today, I don't see any, what I would call, glaring gaps in the product set or the geographies that we play in or the distribution capability. So the types of things that we would do opportunistically would be to fill in adjacent to some of the core businesses. So places where you might see us active as we continue to build out the product set in Asia as an example, or as we continue to globalize our intra business as we integrate A&P and continue to build on the success we're having in our climate business. So there's going to be some places where you may want to do something inorganic versus organic. But I'd say the sense of urgency just given how much opportunity we have now in the portfolio is a lot less than it had been a couple of years ago.
That's completely fair. And Jarrod, maybe just one for you. You kind of looking over the trailing 4 quarters here, the tax rate, probably a little ebbs and flows, we'll call it. But can you just kind of remind us as to how you, all things equal, how we should think about that kind of going forward for '22 and '23?
Sure. I'd say it's always important to kind of look at the full year when you're thinking about that because realizations that happen with any -- within any given quarter are going to cause increases to the amount of taxes that we ultimately have to pay as we approach more a statutory rate of about 24%.
As we look out over future years, our current cash tax experience, I think will be pretty consistent, and that has the ability, obviously, as we have more of those realizations to approach closer to that statutory rate of 24%. So you kind of look at and take that full year, I think it's about 12% is the current ratio of cash taxes paid. And then as we get more realizations, that would increase.
Our next question will come from Adam Beatty with UBS.
I wanted to ask about kind of the development and evolution of the strategy in Asia Pacific, which I think at least partly by intention was sort of a theme in some of the inorganic growth that you've had recently. Specifically, if you could touch on the geographies of Australia, where you have partnerships in distribution as well as obviously, product now. Also in China, and how you see the opportunities there versus political risk? And any broader comments around Asia Pac.
Thanks, Adam. So we have been in Asia for a dozen years. Our early intensive growth in that market were largely focused around U.S. dollar and RMB growth equity investing in China, and learn through that experience just how important it was to be broader in terms of our product set and geographic positioning, which really led us to the acquisition of SSG and the current strategy for growth there. So we are active today in the private credit markets across the region. Southeast Asia, India, a little bit in China, and to an increasing extent in Australia and New Zealand.
And as you are articulating with your question, Asia is a big place with a lot of regulatory complexity, cultural complexity, market differentiation, geography by geography. And so we think it's critical to have people in local markets. That has proved to be particularly important through the pandemic. Travel restrictions in Asia have really highlighted just how critical it is to have boots on the ground in these markets that are able to deploy and asset manage actively. And I think that's been a big driver of our performance as we articulated our special sits composite in excess of 30% returns last year.
We do see a growing opportunity in Australia and New Zealand. We've been investing in growth. They are actively collaborating across our platform, alternative credit, special ops and private equity are all actively collaborating with our Australia team. We are building out what I would call a more traditional corporate lending business and sponsor lending business in that part of the market just given that it is more evolved, more mature and more developed relative to other parts of the Asia region.
China, we have folks on the ground in the local market. I would say, at a very high level, it's a balance. I believe strongly that we need to be there, building local relationships and capability. But given some of the capital markets and the political/regulatory risk, you have to be measured about ambitions in that market, which is kind of how we're approaching it.
That said, we have a pretty meaningful advantage just in terms of the longevity of our teams in that market, some of the licenses that we have that position us for opportunity in the region in a way that others frankly can access. I personally am pretty excited about some of the volatility that we're going to see emerge in that market on the heels of Evergrande and some of the real estate challenges, particularly given the special sits positioning of our business there. My hope is that, that's going to create a pretty interesting investment backdrop for us in '22 and beyond. But I'd say cautious in that market appropriately.
One quick follow-up, do you feel the high net worth channel in Asia Pac is a good opportunity for Ares right now? Or is it still mainly institutional?
Yes, I do.
Our next question will come from Finian O'Shea with Wells Fargo Securities.
Can you touch on within the recently proposed private fund rules, the focus on adviser-led secondaries? And if the proposals on fairness opinions as described would have any impact on that market?
It's too early to say. And again, these are proposals, not -- there's a long way to go from proposals to actual rulemaking. The way that, that market function, I'm going to oversimplify this, those transactions are already getting validated through third-party valuations. So I don't anticipate that if that ever found its way into the market, I'm not suggesting that it will, that would meaningfully change the functioning of it or the attractiveness of the product.
Sure, that's helpful. And as a follow-up, sort of same topic. Do you see the growth of core private equity as absorbing some of that obvious demand for continuation vehicles? And do you think the core private equity asset class is a major competitor there?
It's a good question, Fin. Core private equity or longer-dated private equity has been a topic of conversation now for a decade and hasn't really emerged as a significant growth area the way that folks expected. I think some of that demand is finding its way into the secondary market. And so my own personal view is I think that the secondary market will probably capture that growth more so than core private equity
Our next question will come from Sumeet Mody with Piper Sandler.
Following up on the commentary around the fundraising outlook, after the record year you just experienced, can you size the aggregate fundraising potential for the 25 funds expected to be raised this year? Signing some of the larger funds to help frame out that portion of fundraising? And then maybe some color around how you think that trend extends through maybe '22 and '23 and '24.
So Sumeet, unfortunately, I can't do that because we don't actually talk about funds in the market, but I'll mention 2 things to think about. One, 2022 -- '21, we went into the year talking about that $41 billion record and an expectation that we would beat it. But the $77 million exceeded our expectations, so I'm not saying that they will be exceeded again. But there's a lot of momentum on the fundraising side, and there could be things that occur that are not currently in our line of sight or peripheral vision.
Two, when you look at the fundraising, and we've been trying to make this clear, 2 things are happening: one, we have more strategies, so there's a broader set of funds that are available, which kind of derisks the trajectory; but as importantly, the non-commingled fundraising engine, that's a combination of the perpetual capital vehicles, CLOs, SMAs are taking a greater share. And so one way I would think about it is the floor in any given year is just significantly higher because we're going in with other non-commingled fund levers that we're pulling in the form of perpetual vehicles and open-ended funds.
When you think about the trajectory of the business and the guidance that we've laid out, the good news is the bulk of '22, I think, is really less about fundraising and more about deployment and just monetizing the deployment that we saw towards the end of '21. And when you look at the significant amount of capital that's on the platform today, that's not earning fees coupled with the kind of full quarter and the annual impact of the deployment from Q4, you already have a nice glide path from a profit standpoint in 2022.
So fundraising, obviously, is an important part of it. We expect to have a pretty significant year. So I don't want the message to be that we don't have a lot of fundraising momentum, but $80 billion is a lot. But the good news is the P&L development, obviously, is going to be as much a function at this point on the deployment than [others].
Okay. Great. That's really helpful. And then just 1 follow-up here for maybe Jarrod, on capital allocation. I know you guys haven't been buying back stock last few quarters. Just wondering how active you're looking to get kind of around market action that we've been seeing recently? And expectation here for the share count going forward. You've seen a 15%, 20% increases year-over-year recently just something you expect to kind of manage going forward or what’s the strategy there?
We do have a stock buyback plan in place, but I don't expect to be particularly active on that side. In terms of our share count increase, a lot of that has been a result of our recent acquisitions with multiple in the last few years, and each of those has been pretty accretive. And then I'll remind you, when we talk about stock-based compensation, we're typically targeting about 1.5% to 2% dilution per year on a gross basis, which typically ends up around 1% on a net basis. So absent acquisitions, I'd say that, that's the number you'd focus on.
Our next question will come from Chris Kotowski with Oppenheimer.
Yes. I wanted to go back to the FRPR, the fee-related performance revenues. And I guess, a 3-part question. One is in response to the earlier question, you didn't specify the asset base for both the credit and the real estate side that's subject to these kinds of incentive arrangements. And maybe that was deliberate, you're not willing to share it, but if you are, then we'd love to know that.
Secondly, I was wondering if you could give the same kind of detail on the real estate side in terms of hurdle and performance rate on the real estate side that you gave us on the credit side?
And then thirdly, I guess, what we're trying to get at is just some sense of what would a normalized level be? And I guess, let me define that as if you just started with the current asset base and you had, say, a 10%, let's call it, a normalized return, say, 10%-ish, what would one then expect as kind of a full year level of performance FRPR from that?
Sure. So I'll try and address those one at a time. In terms of the asset bases in the real estate bucket there, it is primarily our 2 non-traded REITs, so you can get a sense of that balance through the NAVs of those entities. And then for the direct lending, that's typically going to be coming from our U.S. and direct lending separately managed accounts in Perpetual Capital. So right now, those amounts are about 27% of that $77 million -- $77 billion, sorry, that we laid out in our Perpetual Capital table that you see in the earnings presentation, that's really the underlying assets that's driving that.
And the next part of your question was in terms of the Black Creek hurdles, very similar base except for those hurdles are slightly lower than 5%.
One thing I would add, Chris, is if it wasn't clear in the prepared remarks. There's some interesting dynamics within the non-traded REIT piece of that, which is for 2021, we only captured 50% of the FRPR because we bought it in June and part of the transaction structure was to ratably share the economics with the selling shareholders. So going forward, in 2022 and beyond, 100% of the FRPR from those vehicles is for the account of Ares. Now 2021 was a very significant performance year. So you'll probably give up a little bit on performance, but you'll make that up on owning 100% versus 50 and hopefully, a growing pie. So when you look at the fundraising in those vehicles in Q4, as we articulated, that was about $3 billion of capital raised into those 2 non-traded REITs in the fourth quarter alone, so you're going to be capturing 100% versus 50% of a growing pie.
Our last question will come from Robert Lee with KBW.
And I apologize if this was asked, parts of it were asked already, but I want to go back to capital management. So maybe, Jarrod, could you remind us, I know you just raised $500 million of very long-duration debt. So maybe just, number one, remind us on how you're thinking of the balance sheet and leverage on the balance sheet? And given the I guess I'll call it more moderate appetite for M&A, given that you have so much going on. How should we think of -- and as you have performance fees presumably accelerating in the next couple of years with the European waterfalls come through, how are you thinking about that incremental capital deployment? Is it just funding the commitments of existing funds as they've grown so much in scale or scope? Or how should we just be thinking about that going forward?
I think you're thinking about it right. Ultimately, we were very happy with terming out some of the line and preparing for the purchase of AMP's Infrastructure Debt business, which we just closed. And as we look forward, we really like the liquidity position we're in, and we like our current leverage levels. So really, you're right, we try and maintain that capital-light balance sheet model. That's still our intention. And really, our use of capital going forward will be opportunistically and any time that we're doing these GP stakes in our funds.
And Rob, I would just highlight, you've heard me say this before, but there's an interesting dynamic that's happening in our company. I don't know if it's happening at others, but the reliance on the management company balance sheet to fund GP commits on new funds is lower than it's ever been because what we're seeing is that the employees here are taking up a growing percentage of that commitment. And so the balance sheet requirement to support new fund raise is lower than it's been. Now we have more strategies, so the aggregate dollars may not be slowing, but the percentage in each fund is continuously coming down. We love that because it provides better alignment of the teams to the performance of the funds. The LPs would prefer to see that at this point. So while we'll continue to make sure that we're there to backstop those, our experience has been, most of that is getting syndicated to employees, which then gives to Jarrod's point, us the ability to use that capital much more opportunistically on new fund strategies, team liftouts and then things like that.
I'm just curious. I don't think it's something I've seen quantified, but if you had to aggregate employee investments, commitments across the platform, and I don't know it's a number you've put in the K or Q before, but what would that be in aggregate?
I'm going to guess, Rob, that it's well in excess of $1 billion. It's probably close to $1.5 billion and growing.
This concludes our question-and-answer session. I would like to turn the conference back over to Michael Arougheti for any closing remarks.
Operator, we don't have any. Again, I just want to thank everybody for their continued support and for the time today. We're thrilled with where we are. It was a great year and look forward to speaking in next quarter.
Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of the conference call will be available through March 11, 2022, by dialing (877) 344-7529 and to international callers by dialing 1 (412) 317-0088. For all replays, please reference the conference number 10162150. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.