Ares Management LP Aktie

All right. We're going to go ahead and get started here. I'm Mike Cyprys, equity analyst covering brokers, asset managers and exchanges. And I'm thrilled to welcome for our keynote fireside lunch, Michael Arougheti, Co-Founder and CEO of Ares Management. Mike, thanks for joining us.

Great conference. Appreciate it.

And Ares, as you all may know, has over $640 billion of assets under management and is one of the world's largest alternative investment managers. So let's kick off with the macro mic here.

3 months ago, there's a lot of debate centered around tariffs and growth. And today, discussion has shifted toward inflation persistence, fiscal deficits, geopolitical risk, energy markets. So what would you say has changed the most in your outlook over the last quarter? And where do you think investors are still misreading the environment?

Yes. Look, we're just saying over there, it feels like a year's worth of news and market developments in 5 months. But frankly, not much has changed. And for those that we've spent time with, I think you've heard us just talk about conviction around higher for longer and to see that now playing through with some of the geopolitical issues globally.

We're not having to reposition our thinking. But I do think that is a meaningful change. I think the stickiness of inflation and rates is something the market has finally come to grips with. I think what people may be misunderstanding in that environment is that in the alt space, higher for longer, especially at these levels could actually benefit performance, not hurt performance.

There are definitely corners of the alternative space. Equity is an example, where obviously higher rates has an impact on levered performance. But in places like private credit, where the instruments are structured around short-term base rates, higher rates are actually a pretty big boon to performance, and I think will help continue to spur investor demand, but also to mitigate some of the anxiety around risk in these portfolios because that excess return is a pretty big offset to potential loss.

In terms of the macro, though, and this is -- it just really speaks to the resilience of the market. We have investments in over 3,000 companies and real estate all over the globe and big investors in the digital infrastructure transformation happening.

And everything we're seeing on the ground, which is what we're seeing in public market earnings as well is that the fundamentals are still really strong. We're seeing EBITDA in our corporate portfolios growing plus or minus 10%. We're seeing high occupancy rates in our real estate book, 95% to 98%. The lease demand for our data centers is as good as we could ever hope it would be.

Consumer is proving to be resilient, albeit the talk of the K-shaped economy is valid. But when you look at it on an index basis, the fundamentals are still very strong.

And what would you say are the 2 or 3 KPIs or indicators that you're watching to tell if the environment is becoming meaningfully better or worse?

Yes. We look -- we first go to the portfolio level data that we have, which is unique because we get it more frequently than public markets do, and we have access to things like working capital line facility draws that are leading indicators of potential liquidity hoarding or distress.

So I'd say on the lending side, it's the things that people know that we look at, which is just loan-to-value and debt service coverage and EBITDA growth and all of those things. But the leading indicator is revolver draws because what you see in moments of stress, people pull forward on the revolvers to either get ahead of illiquidity or to just start hoarding cash to make sure that they meet their debt service.

And we are not seeing any abnormalities in the way that people are managing operating cash. We wouldn't expect to, but that's kind of an indicator. And even in things like COVID or tariffs, you'll see people pull lines. They're not doing that now. On the real estate portfolio, obviously, we're looking at NOI and property level data, but the key there is just lease velocity and rent growth.

And as I said, that continues to be very strong. And then on the data center side, we're looking at all of the raw material inputs as we develop properties. But I think the most significant thing to look at is just lease demand and lease rates.

And as I said, those continue to be pretty strong. We then go to the secondary sources, which is card companies, banks, et cetera. And again, if you look there, credit performance, when you look at net charge-offs and delinquencies is still really low relative to historical cycles.

So there's not a lot we're seeing that would cause us concern in our book. And then when we zoom out and look at the traded credit markets and the bank and card companies, we're not seeing it either.

So given that constructive tone on the macro, let's shift and talk about deployment, right? How are you thinking about putting your, call it, over $100 billion of dry powder to work in this environment? Where are you seeing some of the most compelling opportunities as you look across the globe? And do you think '26 could be a better year than '25 for deployment?

Yes. I think one of the things that may be underappreciated about the platform that we've built is just how broad-based the origination is in terms of the number of people that we have in local markets up and down the capital structure in real estate, infrastructure, all forms of private credit, investment grade, subinvestment grade, so on and so forth.

And so when we start to talk about deployment, the conviction that we have is less just a commentary on transaction activity or even macroeconomic strength, but it's just we have so much deployment capacity that we've created in these markets, and they work in tandem. So you may see slow M&A growth show up in weaker deployment in corporate direct lending, but then you're going to see deployment pickup in opportunistic credit and secondaries.

And so what -- you've seen the floor for our deployment increase every year and then the ceiling is increasing as well as we broaden out capability. We did talk about on our last quarter's earnings call that we were seeing record pipeline levels across the platform. We have about $150 billion of dry powder today. We raised close to $140 billion last year. And so we're kind of raising and deploying at a pretty healthy clip.

Right now, the places where we're probably seeing the most deployment are European direct lending, asset-based finance, digital infrastructure and secondaries are probably the 4 most active. The U.S. direct lending business is starting to pick up after what was a seasonally slow Q1. And then the real estate business is kind of, I'd say, in a good place, neither hot nor cold.

Well, those are all the different areas we're going to dive into. But before we do, a recurring investor question has been on whether deployment is translating into fee-paying AUM, right? How efficiently is it translating. So I guess how should we think about the sort of gross to net conversion of deployment here in the second quarter and as we move into the second half, especially if volatility is causing refinancing activity and sponsor behavior to happen as well?

Yes. Again, gross to net is an important metric, but it's not the only metric because you have growing TAMs and your kind of gross deployment ahead is outpacing the in-force book again. But when you think about the hedge, if you have slowing transaction volume, that's going to reduce your gross deployment, but it probably means that there's something happening in the market that's either rate-driven or geopolitically driven where your refinancing pace is probably slowing.

And so again, back to maybe what's misunderstood, I think there's a view that if rates are high and transaction volumes slow that, that may not actually translate into profitability. But when that happens, you just see much less opportunistic and regular way refinancing business take hold, and that's kind of what we're experiencing now.

And then there's obviously all the growth in permanent capital and open-ended vehicles that's obviously supporting continued positive momentum on the gross to net. So it feels good.

Great. Why don't we -- over the last 6, 9 months with some notable bankruptcies and media commentaries discussing liquidity and retail-oriented products, while Ares is one of the bigger institutional players in the private credit market.

So what are you seeing in the marketplace today and going forward for the remainder of the year? And how much of Ares future growth would you say comes from the traditional sponsor-backed lending versus newer areas such as ABF, for credit, real estate lending and so forth?

Yes. Like I said, sponsor lending is an important part of the private credit market, but it is not the only part. When we talk about private credit, it's sponsor lending globally. It is real estate lending globally. It's infrastructure lending globally. It's asset-based finance. It's loans and bonds and CLO management. It's systematic fixed income. it's credit secondaries.

And so sponsor lending is probably the most mature part of the business. There's a real core allocation for investors and a great business for us, but it is becoming less important over time as the market continues to grow and our business diversifies.

I would say that this market anxiety for me is -- there's a disconnect because if you were to look at the credit performance of our portfolios, just to speak about what we're seeing, our loans to value are plus or minus 45%, meaning that the private credit exposures that we have in our corporate book are supported by 55% equity value.

And so in a diversified portfolio, that is a meaningful, meaningful amount of value that needs to get eaten through in order to see losses start to come into the credit book. Interest coverage ratios are in the low 2s, 2.2, as I mentioned earlier, EBITDA continues to grow. So there's a natural deleveraging taking place. And the rates of return are what people underwrote.

Nonaccrual rate in the portfolios is low 2s, 2% at cost and at fair value, it's probably 1.2% to 1.5%, depending on which geography you're looking at, which is well below historical averages. So if you just parachute it into these portfolios without regard for some of the headlines that you've mentioned, you would not come to the conclusion that there was stress in the private credit markets.

So the anxiety is forward-looking, and it's really narrowly concentrated in U.S. wealth. And interestingly, when you look at U.S. wealth, we're seeing really positive momentum in the non-private credit parts of the channel, and we can talk about that because I think that's another way to get your head around just this disconnect that's happening in the market.

On the flip side, the institutional investor community continues to allocate aggressively into private credit for 2 main reasons. One, as a cohort, they are underinvested in private credit. And so you just have secular demand continuing to grow. And two, I think they view some of this volatility, which has widened out spreads, increased fees and generally improved returns as a huge opportunity to go in and kind of capture that excess return.

And so while there's a little bit of noise in the U.S. wealth channel, we've seen, as an example, our third opportunistic credit fund got to its hard cap was meaningfully in excess of its prior vintage. We had a closing this morning on our third alternative credit fund, Pathfinder III. That raised $8.5 billion, which was its hard cap off of a $6.5 billion cover.

We also saw about $4 billion of capital from investors in the prior fund extend duration alongside that closing. So $12.5 billion came into that strategy. So there's nothing that we're seeing institutionally that mirrors the anxiety that is happening in that corner of the world. And as you and I have talked about, I think what the market doesn't really appreciate is if you look at wealth in private credit, it's about 10% of the business.

And so even if you see redemptions in wealth, the vast majority of capital that is flowing in and getting deployed is coming from the institutional market. And from the lens of Ares Management's business and profitability, to the extent that the growth in wealth for private credit is slowing, that deployment just shifts into the institutional funds. So it doesn't have any meaningful P&L impact, which I think people probably misunderstand.

And one of the areas of growth that you touched on is asset-based finance or ABF, which increasingly looks like one of the largest opportunities in private credit. So where would you say we are today in terms of institutional adoption of ABF? And how much of the addressable opportunity do you believe is accessible for alternative asset managers?

I think you have to think about ABF as 2 different markets. One is high-grade ABF and the other is sub-investment-grade ABF. The high-grade part of the market is obviously significantly larger just because of the levered capital structures within the asset-backed finance business. That's a pretty mature part of the market.

Banks, insurance companies and the securitization apparatus have done a really nice job kind of serving those borrowers. There is meaningful transformation happening in that part of the market, though, as some of the alternative asset-backed insurers are scaling and taking share from those incumbents and then also innovating around different structures direct to corporates and direct to assets to grow that business.

So I think it's a huge TAM. I don't know that it's growing as much as maybe people would think it is, but there's a huge share shift happening for the benefit of the alternative managers.

And then in the sub-investment-grade space, it's a much different business. I tend to think that it is a higher skilled, higher risk part of the business. And so you have to approach it differently. It's also a much higher fee, higher-margin business.

And so one of the things when we're talking about private credit, the fee rate on non-investment grade is probably 8 to 10x core fixed income and asset-backed. So if we at Ares have $35 billion of non-rated ABF, which is the largest platform in the market by far, that would translate from a P&L perspective to $300 billion to $350 billion of high grade.

So again, the market -- we like to throw around numbers, but not all AUM is the same. The outcomes that you're delivering to your investors is different. the relative alternatives in the public markets is different.

But yes, ABF, big, big TAM, big transformation shift happening. We have tried to think about the market as wanting to be balanced between the rated and non-rated part of the market because there are origination benefits that you get if you can be scaled at the top of the capital stack and at the bottom.

And we've also tried to do it through our own captive insurance business, but also in partnership with our third-party insurance clients because, as you know, we've been very focused on staying asset-light in the way that we've grown the company.

So I think you'll continue to see innovation around it. I think you'll continue to see conversations about regulation and structures in response to that innovation, which will get headlines as well. But yes, it's an exciting part of the market for sure.

Well, since you mentioned regulation, I mean, clearly, we're in a deregulatory backdrop with regulators easing capital requirements across the banking sector. But at the same time, the NAIC is actively updating its oversight framework for insurer exposure to private credit.

So what do you think -- what do you anticipate from that NAIC insurance capital review? And what implications might there be across the competitive, the regulatory competitive landscape?

Sure. NAIC reviews, and that's a constant in the market. It's not like the NAIC comes into the market every couple of years and makes transformational change. So I don't expect major transformation here. But I think what it is highlighting is that there will probably be a shift to greater transparency required in the market just because as the insurance industry continues to lean into private markets investing, the regulator is going to want more transparency into structures and performance, which is absolutely appropriate.

I think you'll see conversations and scrutiny around private ratings and ratings methodologies for some private market exposures versus public. Again, appropriate because if 90% of an insurance company's balance sheet is rated, making sure that you have the right ratings framework is critically important.

And I think you'll see certain regulatory capital changes come into the market in places like CLOs and others, which is part of the dialogue now. But there's not going to be wholesale changes. I think you'll see certain pockets of the market get reviewed and have different regulatory capital -- all of that is beneficial to the long-term growth of private credit in insurance.

And I think it's important that people understand insurance companies need private credit. When you look at the requirement to generate excess return and you look at the current size of the traded markets in order for them to meet their objectives of their policyholders, they rely on private credit.

So this is not a world where we're all going to wake up one day and the insurance industry is not going to continue to have high demand for private exposures. It's really going to be what's going to be the disclosure regime and how much transparency can we get to make sure that they can continue to grow there.

I think like all things, and we saw this in the noninvestment-grade part of the market, I think it will benefit the larger platforms who can invest in regulatory compliance and data and systems and all the things you need to do to drive that type of transparency and access. So I think the implication for competition is you'll see continued consolidation within the private credit space with the larger managers.

And why do you think it's going to be beneficial for private credit managers or people think...

Changes. Regulation, I think -- and we should talk about banks. Regulation does not mean bad, right? Regulation, when it's appropriate, means increased transparency and increased understanding.

And I think part of this disconnect between what the headlines say and what's actually happening in these portfolios is probably just partially a function of a lack of understanding, a perceived lack of transparency.

And so I think if regulation is driving to more appropriate disclosure and better transparency, that is a good thing for the asset class. which is why I say that it's good. I don't think these regulations are going to constrain the business in any way that's harmful.

Similarly, if you look at banking regulation, with the new Basel III end game, you've actually seen that it is now more efficient for banks to lend to nonbank loan portfolios than to make loans themselves. If you were to read the newspaper, you would think the exact opposite is happening, which is we've had reg cap relief and all of a sudden, the banks are going to recapture market share in the middle market, and that's not what's going to happen.

What's going to happen is they will continue to diversify their risk by investing in the portfolios that we originate and risk manage for them. And then where they are getting relief in places like investment-grade exposures, commercial mortgages, they're going to be able to lean in and capture some share gains there as well.

I think generally, when I look across our business, I think the insurance regulations that are being talked about because of the sub-investment-grade focus of ours will be probably less relevant than maybe for some of the high-grade focused peers. And I think that the bank regulatory capital changes are going to be a big benefit for liquidity in the private credit space.

Staying with private credit, another topic that often comes up is the durability of excess spread. So when you think about the components of what's driven that in the past, how do you see those components evolving going forward in light of more competition, regulation, but at the same time, there are some factors that are looking to bring more liquidity and transparency to aspects of private credit markets. And maybe your answer differs between the sub-IG and...

Yes. And again, I think you have to always -- whenever you hear private credit, you have to stop, take a breath and say, are we talking about high grade or sub-investment grade. Creating liquidity in, for example, Ares owns 100% of most of the loans that we originate. Creating liquidity in that is antithetical to what it means to be in the private credit business.

So the idea that we're going to trade private exposures, that just means you're now creating syndicated loans and high-yield bonds. that may be originated outside of the banking system, may be distributed to different participants. But that in and of itself, frankly, doesn't make a ton of sense to me. I think in the high-grade world, where you've got massive capital structures and bond math is easier to do and credit risk is maybe less relevant than rate risk.

I think you could start to have a slightly different conversation about liquidity and pricing and all of the things that are in the market. So I think it's not as simple as just saying private credit. I can't remember what else you asked me about pricing.

Just about the durability of the spread, but also the components you think about illiquidity versus... origination.

I think the -- the overarching view, which is probably true, is that over time, the excess spread in private credit was illiquidity premium. What we've always tried to highlight is it is illiquidity premium for sure, but then there's also what I would call complexity premium in a lot of the corners of the private credit market where you need to have real skill in structuring some of these exposures the right way to get it done.

There's always been, at least in our experience, a relationship premium because the borrower who's borrowing in the private markets versus going into the traded markets is doing it because they actually value the bilateral relationship that they have with their lender so that, that lender can fund growth efficiently.

And so that when things get difficult, they're negotiating with one person and their capital structure is not trading where someone can come in that has different motivations than they do and actually take their company from them.

So there's embedded premium that you can extract because of the value proposition to the client. And so all of that is still there, and it's still very, very durable. I also try to remind people that when you look at levered returns, whether you're talking about private equity market or the real assets market, the biggest driver of return is growing your cash flow, NOI growth, EBITDA growth. And the second is multiple expansion.

Way down the list is cost of capital. And once you internalize that and you begin to put yourself in the shoes of that institutional private equity owner or institutional real estate manager, they're going to be much more focused on the solution that you're delivering to them than the cost of the solution.

Obviously, it has to be within an appropriate range. There is one other thing that is happening in the market today, which is somewhat counterintuitive is there's now a scale premium that we're seeing in the asset-based finance part of the market and in certain pockets of digital infrastructure lending, even the high end of the private credit market, where the loan sizes are getting so large that there are only a few players in the market that can actually deliver the private solution.

And so they can command a premium for that execution at that size, which is somewhat counterintuitive, juxtaposed against what we're seeing in today's market where the lower middle market, smaller assets, smaller companies is actually seeing spread, if not compression.

You're not seeing spread widening right now just because there's enough capital in that market to meet the demands of the borrower community.

And is there a particular magnitude of excess spread if we were to quantify that, that you think is durable?

Yes. Over the 30 years we've been in the business, it's typically been 150 to 300 basis points excess return over the rated equivalent.

And looking forward over the next...

I would expect it to be in that range.

In that range. Okay. Why don't we shift gears and talk about digital infrastructure, which you mentioned the major opportunity theme for Ares. Market often treat digital infra as oftentimes a simple data center proxy.

But in practice, the opportunity spans across development, power, renewables, credit, real estate, operating capabilities and so forth and so on. So I guess what have you learned since adding GCP, which probably expanded your footprint capability set? And how are you deciding where Ares has the highest right to win? And how else is Ares leading into this?

I think you hit it in your question, which is -- well, our core philosophy has always been that if we want to build vertical capabilities in these various markets. So if we're going to be in real estate, we want to be able to develop real estate. We want to be able to own real estate as an equity owner.

We want to be able to lend to other real estate managers. We want to trade the secondaries exposures there. We want to maybe look at REIT stocks, whatever it would be in that ecosystem because what we've learned is, number one, you're a better lender if you have the ability to view the world through the eyes of the equity and you're a better equity investor if you understand the lending investment thesis and how to best capitalize your asset.

It also just gives you, I think, a more rigorous relative value lens so that when you're seeing assets and companies, you don't naturally just try to shoot into whatever your capability set is. And so if you have the full complement of capital and cost of capital, you could put the right risk into the right structure, and I think it actually benefits performance over time.

Digital infra is no different. So when you look at what we do in digital infra, we are a big infrastructure development house, both data centers and renewable power, traditional power. We are a very large lender to other developers and owners of these assets. We are playing at the adjacencies in the market and things like transmission, renewable power and all the things that you mentioned.

And so bringing that full skill set, I think, is important. In terms of the -- where the most attractive segments are, I'd say right now for us, and this came on the heels of the GCP acquisition, we acquired a 100 person now, it was 85 when we bought it, global data center development team, all from industry that had been being built since 2018.

And when we bought GCP, that development capability came to Ares, and it came with a pipeline of seed assets that were in flight, totaling about 750 megawatts of power. And so what we've been doing in the early days of the integration and growth of that platform is taking that development capability, integrating into our broader infrastructure business and then building the investment management capabilities on top of it with some pretty quick success here.

That's super attractive to us, but it's a fairly narrow view of how to play data center development. And so what we're doing there is large-scale urban centers, Tokyo, Osaka, London, Sao Paulo, Washington, D.C., Dallas, where we are doing large campuses, for hyperscalers, pre-leased 12- to 15-year leases with escalators that's a really good way to play the market.

We are not doing secondary and tertiary markets. We're not speculatively building data centers. We're not focusing on LLM training facilities. We're not speculating on land, right? So it is a very -- but back to my comment on scale, these are massive projects. And so if you want to actually own that land, entitle it, power it, negotiate globally with the hyperscale client, it requires a certain scale in terms of your capability and your capital that very few people have.

That view does translate through most of everything else we're doing in digital info. I would say maybe one exception is certain geographies you may want to own versus lend just because the competitive capital may be different or maybe our competitive advantages in places like Tokyo are meaningfully different because we're such a large industrial real estate manager in that market that we can leverage into a land bank that very few people can replicate.

But I will say back to some of these moves in the market and the fundamental strength, this CapEx is real. The pipeline that we have built because we had been seeding, if we can bring these projects online, entitled empowered, they're getting leased. I mean it's been remarkable, both the competition on the leasing side and the uptake in terms that we're getting if we can get people to the front of the line because I don't think that the market is bringing capacity on fast enough to meet the demand of the hyperscalers right now.

Why don't we turn to fundraising. Ares had a record year in '25, and you recently commented that Ares is likely on track for another record year here in '26 after raising $30 billion in the first quarter.

So how are conversations with LTs evolving in this market backdrop? Where would you say you're seeing incremental demand? And what strategies are you seeing maybe demand exceed your ability to source attractive assets?

Well, I don't -- the second part of your question, I'll answer first. We're -- we've been very disciplined in our history of not raising capital that we can't deploy timely and deploy within the investment objectives of the fund. And so whenever we're in the market with a fund, it's sized to meet what we know our deployment capability is.

I'm glad you mentioned that because, again, back to people throwing around large TAMs and AUM numbers, the constraint to growth in this market is origination. And the moat is sourcing and origination and portfolio management. You can raise money, but if you can't put that money to work consistently through cycles and generate performance, you don't get the right to grow.

And by the way, if you raise too much money and you don't put it to work, that's bad for your investors, too. So when they're allocating, they're allocating to get return, but they're also allocating to get invested.

And we have seen people in our market make the mistake of taking capital on that they can't prudently deploy, maybe not seeing it appropriately because they're trying to buy share, and then all they do is disappoint the investors.

So we don't -- everything we do at the company is through the lens of origination, scaling origination, diversifying origination, creating new capacity and new capability and then that feeds into the fund complex.

You saw it in Q1. The momentum was great in both institution and wealth. I mentioned the ABF fund that we announced today. That was in the market for 5 months, and we raised $8.5 billion against a $6.5 billion cover. So I think for high-performing product with scaled managers, the demand continues to be there in the institutional market, and we're seeing that across the board.

I don't -- I wouldn't say that private credit is outpacing the demand that we're seeing in places like industrial real estate or the data center development business. It's been pretty broad-based demand. And I think it is indicative of the performance that we're able to deliver the differentiation of the performance and the scale because I think for a lot of the large allocators who want these exposures, they need to come to large managers who can get them deployed and that scale benefit continues to feed on itself because if you reinvest in scale, you accumulate more capital, more capability, it's a virtuous circle.

And you can see that happening as the private markets mature, the larger getting larger, and it's actually improving performance in a lot of these businesses. And so I think that's -- we're kind of right in the middle of that trend right now, and it's why we're putting up the numbers that we're putting up. The other thing I would highlight is that the momentum in wealth is still incredibly strong as well. For Q2, we did about $3.6 billion gross in the wealth channel. That's 10% up year-over-year.

And just to put it in perspective, it was about $4.2 billion in Q1. So roughly flat to flattish to Q1 despite all of the anxieties around private credit. So I think that there's a narrative that maybe even wealth is still not open for business, and it's quite the opposite. You're seeing meaningful uptake across the diversified product set that we have. As an example, we have a core infrastructure product that we put in the market recently that's been scaling nicely. We did about $1.9 billion in the quarter in that fund, $850 million in June alone. So the diversified product set there is kind of growing through the slowdown in private credit.

See, you already jumped ahead to one of the other questions I had. So just to make sure it's $3.6 billion is what you did in the second quarter here.

That's all done because you have the June already. That's up year-on-year, 10%. Of that $3.6 billion, there's a core infra retail private wealth vehicle in there that did $1.9 billion.

Yes. And did that get on added to a new platform that's driving that...

It's been pretty broad-based. So it's in its early phases. So we're adding platforms. So I can't say what it's going to be next quarter, but it's not a blip

Sure. Maybe more broadly on wealth, which is a massive addressable market, where you and your peers have all made some headway here with new products, distribution efforts. What do you think ultimately will drive success in the channel and separate the winners from the laggards?

And talk about some of the steps that you're going to take in the coming years to be on the winning side.

Sure. I'll talk about structurally what it takes to just be a meaningful player because you have to be in the game to win the game and then what I think it takes to win. So these products need to be large because you need real diversification and access and so I think by definition, the market will gravitate to the larger platforms who can build scaled exposures with appropriate diversity, but then who can also build the servicing engines to service the client, educate the adviser community, leverage relationships with the platforms like Morgan Stanley.

And that's really what it takes to be meaningful. If you look at what we have in wealth, we have close to 200 people in 15 offices, touching investors in 50 countries around the world. Selling 8 diversified products, 7 of which are all over $2 billion already. We probably have, as of the most recent publicly released information, a 10% market share, which is probably #2 in the market, still represents an incredibly small piece of our overall business.

But I think what we've learned is you have to make a huge investment in product and people and technology and outreach in order to be successful. But like anything, I'm going to go back to what I said earlier, what it takes to win isn't accumulating assets, it's performing.

And what it takes to win long term in wealth is for people to get the outcomes that they want that they signed up for and to have a positive experience being your client. And that requires the same level of rigor when you're investing in a wealth product that you do for a large pension or sovereign fund.

And I think that's just -- it's going to take time. You're going to see winners and losers shake out around scale and distribution capacity. And then you're going to see winners within the winners that shake out just based on differentiated performance the same way that we all compete in the institutional market as well.

To your point on investors having a positive experience in the channel, we often hear questions around to what extent do these redemption prorations sort of get in the way of that positive experience? And if this happens over a repeated sort of cycle or time frame, and it wasn't that long ago, we were here talking about in the non-traded REIT space, at what point.

Which, by the way, are not -- like if you look at our non-traded REIT flows, a, they were pretty consistent through that period of volatility; and b, they've been accelerating again. So there are going to be ebbs and flows. I think our market made a mistake by not adhering to the 5% redemption limit because it muddy the conversation around why that existed in the first place as a structural feature of the product, not a structural risk of the product.

And now we all have to kind of recapture that understanding, which I think the market will do, a, because it has to; and b, because it's the right thing to do. The reason I say that is if you think about investor experience, which is why I have such confidence that the markets will grow through this, looking at our own experience in our nontraded BDC, where we limited to the 5%.

I want to say that we had 11% redemption requests. It was from less than 5% of our investors. It was largely concentrated in small institutions and family offices, not in the U.S. And had we actually used fund liquidity to satisfy the redemption demands of less than 5% of our investors, that's not in the interest of the 95%. And that's not being talked about. So as a fiduciary, we have 95% of our investors who believe in what they own, right?

They said, I want to own private credit exposures with Ares. I want to make an 8% to 10% return with a high current yield, and that's what they bought, and that's what they want to own. And so you can't then take liquidity away from them to give to somebody who doesn't want to own it anymore.

So I think what you're going to see is there's going to be a concentration, and we saw this in the REIT space, too, of that redemption queue. I think people are elevating their redemption requests in order to try to get a higher pro rata share of whatever redemptions exist, and then it will work itself through.

So I do think it's important that people ask what's the percentage of investors that wanted capital back? And what do they look like? Where do they live? Are they really investors? Because what I will say, at least based on our experience, the U.S. well-advised high net worth wealth consumer is continuing to grow their alts exposure, and they are not regaining the way that the market may think that they are.

Let's shift and talk about AI, which has been a major theme across markets. We talked about it earlier as a deployment theme, but now let's talk about it as an opportunity at the management company level at Ares. Talk about how you're experimenting with it today across the organization, some of the use cases you've put into production. Any sort of measurable productivity gains or otherwise that you could comment on?

Yes. I mean, obviously, I think any scaled company, if you're not well advanced in your data and AI strategy, you're already woefully behind. And so we've been reorganizing the plumbing of Ares for the last 5-plus years to make sure that we enter this phase of tech transformation with the right data architecture and governance so that we can actually exploit the opportunities that are being created now.

The best way that I would articulate it is we've created a Agentic AI layer that sits on top of the 500-plus systems that run the company, and we are doing everything we can to run the business more efficiently. That's a combination of either cost takeout or just economies of scale in places like client service and client reporting and performance analytics, due diligence questionnaires and request for proposal, AML, KYC and investor onboarding.

So all of the work streams that exist at the company can, in some way, shape or form, be enhanced through the use of AI, and we're running hard at all of that. Two, we are using it as best we can to not replace our professional investors, but to supplement.

So places like the pre-population development of financial models, pre-population development of investment committee memos. All of that is geared to make the people that we have more efficient so that we can get more throughput of the people that we have and make sure that our highest talent investors are spending more of their time making investment decisions and analyzing information rather than synthesizing it.

And then obviously, we're trying to take those learnings and push them where we can into the portfolio company and trying to drive the same level of growth and efficiency that we're seeing in our own company in the portfolio as well. I think you'll probably hear from a lot of folks, we are in a phase where we're going to see margin expansion.

We've already said that we would expect to be at the high end of our guidance. But where we're creating savings, we're reinvesting in growth. And I think that, that's going to be a consistent theme, which is this is not about cost takeout. This is about velocity and being able to reinvest in growth in ways that we weren't before, and it's pretty exciting.

Great. We're out of time. Mike, thank you so much.

Thank you. Appreciate it. Thanks for sharing lunch with you.

Everybody, thank you. Thank you for joining us. It's my pleasure to welcome Ares Management. Blair Jacobson is with us here today, Co-President of Ares and previously Co-Head of Ares' European Credit business.

Ares, of course, as many of you know, is a leading global alternative asset manager with deep expertise in credit, but also in many other asset classes, including secondaries, real assets and private equity.

Thank you for being here. I think this is your fourth time at this conference?

It is.

So really appreciate your support and great to spend some time with you here in Europe.

Good to be here in Zurich with you, Alex. Thanks.

Great. So I wanted to start with a question around developments in private credit, not surprisingly. I feel like over the last couple of months, I think some of the hysteria around the product have subsided just a bit. And obviously, we've learned a lot more around the institutional dynamics versus retail dynamics in the marketplace. So hoping maybe you could start there.

And now that the market has come down to some degree, we'll see what the next few months look like. But spend a little bit of time just walking through how institutional appetite has evolved towards private credit and to direct lending in particular. Any distinctions you're able to make between either geographies and LPs and how institutional clients are navigating the current backdrop?

So I think you're starting at the right place because for a firm like ours, despite all the news, wealth is 10% of what we do. We are really an institutional firm. So you're starting with the right focus area. And for us, we're coming off the backs of 2 record fundraising years. We had a really strong first quarter as well. And I think what that tells us is that institutions around the world view private credit and direct lending as a core long-term holding.

And in fact, what we're seeing today is renewed interest because we've said publicly, we believe this is a really attractive investment environment. We're seeing spreads widen because of volatility, because of some of the trends in wealth and retail. And institutions see this, too. They think this is going to be a very, very strong vintage year. And we see this in our own fundraisings.

We announced early this year, our closing at the hard cap of our third special situations fund. We're in the market now with an asset-backed fund. Mike gave some good updates there. You'll hear more about it soon. We've pulled forward the raise for U.S. direct lending strategy. Again, the institutional market, we think, is quite solid. And it's also broad based to your question about air pockets, whether you are a corporate pension plan, state plan, public plan, sovereign wealth, insurance, the need for alternatives and credit, we think, is growing.

We had a little bit of an air pocket in the Middle East starting in Q1 with the war. That's more of a timing delay, we think. We saw this a year ago as well with the tariff regimes. Again, that's -- it's coming back. But overall, the institutional demand for what we do is quite strong.

Great. Let's double-click into kind of a subvertical within now, which is U.S. direct lending business. It's a large one for you guys, and it's still probably the one that the market is most anxious about in terms of both credit performance, but also kind of the outlook for growth. As you mentioned, you're in the market with the next vintage senior direct lending fund in the U.S. There's a bit of a unique structure to this one relative to what we've seen in the past with the launch of an evergreen sleeve in addition to the closed-end fund. So talk to us a little bit about, is it just a coincidence that this is the structure that's evolving now on the back of some of the concerns towards the asset class? What prompted you guys to do this? And maybe just for the audience, explain what that actually even looks like?

So I'd say, without diving too much into the fund itself, as you know, we're sense about speaking about that. I guess, I'd frame the discussion by saying, we think it's our job as investment managers to give our clients as many access points into what we do as possible. So when I started European direct lending at Ares, it is about 15 years ago, there was like one access point.

Now we offer levered, unlevered, 4 different currencies. So always trying to think how can we make it more attractive or easier for clients to access what we do. So going to the topic that you mentioned, within our asset-backed fund 1 or 2 funds ago, we created an evergreen option. And what that means is for institutions, which tend to have drawdown funds that draw down and repay, some of them want exposure for longer. They want yield for longer. They don't want to have to re-underwrite the manager every 3 years. By the way, many still do. So when we think about the new strategy, what we've said is we just want to make an additional option available because that will be attractive. And again, our view is that broadens the appeal for this asset class and opportunity in the U.S.

Got you. So maybe expands the LP base opportunity set a little bit and just kind of get a different wrapper to kind of co-invest alongside of the main fund.

Yes, exactly. And what's really important to remember is that it's all part of the fund complex. Everything invests in the exact same loans. So from an administration perspective, it's not onerous for Ares at all.

Got it. Okay. Let's talk about credit quality. A topic of the day. Topic of the day, topic of the quarter, topic of the year. So we spent quite a bit of time in this. And from everything we could see in the sort of public domain when it comes to direct lending exposures reported by the BDCs. The non-accruals at the industry level are still fairly benign. They're rising a little bit. We're definitely starting to see a little bit more dispersion between different managers. But by and large, you're not really seeing significant declines in credit quality.

The concern is, of course, is this is not today's problem. It's a, hey, businesses and software in particular, that could be disrupted on the back of AI is not something you're going to see today, but this could be a problem 3 years from now. So how do you guys approach that because you've done a lot of work within your own portfolios and maybe talk a little bit about some of the consulting engagements that you have done? And how do you think the industry deals with this kind of cliff in credit several years from now if and when it does occur?

So let's unpack that in 2 different ways. The first is just the broad comments around credit quality. We would agree with what you said. We get signals from thousands of companies in our portfolios around the world. And it's not a surprise. The macro environment is relatively benign. There's volatility and inflation concerns and oil prices and rates. But broadly speaking, the U.S. is growing 2% this year, Eurozone U.K., 0.5%, 1%. And what we've said publicly is that our portfolio companies underneath that are growing high single digits, low double digits, credit quality and the statistics that we monitor, whether it's leverage levels, interest coverage levels, loan-to-value levels are all trending the right way.

And ultimately, the statistic you mentioned on accruals, which just to explain it, is a potential precursor to defaults and losses have not only they been stable, but they're below historical averages. So again, what we're seeing now in the portfolio is good. And that also frames with what we see in the broader markets. You're not seeing cracks in the loan market or the bond market. In fact, when banks have reported earnings, charge-off levels have been going down for consumer credit, for C&I, for credit cards. So again, all that's relatively consistent.

But then the next part of your question, well, where are things moving, in particular, in sectors that are experiencing a bit more volatility like software and more concern. This came to the fore earlier this year when Anthropic released a couple of new cloud models that got the industry really, really bothered. But if we take a step back, we've been investing in software for 15 years, and obsolescence is always the most important question in any tech or software lending opportunity. So this has always been on our minds.

So the narrative, however, has changed from the beginning of the year. Beginning of the year was SaaSpocalypse, AI eats software, all of these things. I think now the narrative is software is not one thing. And over time, there will be winners and some losers. But what we're not expecting to see is some system-wide meltdown in credit more broadly. And you're right, we did hire a third-party consulting firm to come in over our shoulders to investigate. We have about 180 software loans around the world. And the results that they came back with were confirmatory with what we already thought, which was over 85% of our companies, not only will face low risk, they may even benefit from AI developments, another 14% or so were sort of medium risk. And then on the higher risk, it's like 1%. It's less than a handful of companies.

So for us, we think that, that's relatively boxed. The duration of these loans is another 2 or 3 years. So again, some things will resolve themselves relatively quickly.

And how does that actually happen? We have said that we do not intend to amend and extend these loans. There's 60% equity coverage in these loans. So the sponsors have a lot of incentive to help generate additional value in those businesses and adapt. But if they don't or they don't want to, these businesses still generate a lot of cash. And in most of these loans, by the time of maturity, we've already gotten back 60% of our capital. So again, we think that those risks are relatively manageable and we will face a very small percentage of portfolios.

Got it. Okay. Let's bring this a little bit closer to the region. You guys are, I believe, the largest European direct lender. It's been obviously a business that's very near and dear to you. But talk to us a little bit about how the growth opportunities in European direct lending might differ from the U.S., which obviously has been much more of an established market, how the competitive dynamics, if at all, have shifted in the last year or so and just your broader prospects for European direct lending.

Yes, sure. So you're right. This is a business that's near and dear to my heart because I've helped build it for the last nearly 15 years, when it was relatively nascent. It was about $1 billion business for Ares today, it's an $80 billion or $90 billion business for the firm. And that sort of tells you a little bit of what you need to know, and you alluded to this, which is to say U.S. market is older. It's 25, 30-plus years old. I would say relatively more mature, whereas Europe really started to develop post-GFC when the banking system got highly disrupted. So even though we started in Europe in 2007, the market itself really got going 2012, 2013.

And further, U.S., one big market, it's all in dollars. Europe, 27 different markets, different languages, different regulations. So it's sort of harder to penetrate. And our strategy since inception is we've had local people and local offices. We have 7 offices around Europe, and that's really been helpful for us.

Some of the other dynamics that don't fully translate is, number one, there are no BDCs, in the European market. And again, that's really the growth and generation of the U.S. market. These listed loan vehicles don't exist in Europe. And further, the wealth opportunity in Europe, the single biggest wealth funds in private credit in the U.S. are $70 billion, $80 billion of AUM. The biggest one in Europe, and we know this because it's ours, is $7 billion or $8 billion.

So again, it's a little bit more of a cottage industry where you have to be local, and that creates entry barriers. So if you're a large-scale player, we think it's really attractive. And again, the penetration of private credit versus the banking sector also still has more to play out. So we see a lot of continued growth in European direct lending ahead.

Got it. Okay. Let's pivot away from direct lending, but I would like to stay on credit for a couple of minutes. I feel like one of the points that I kept just repeating over and over again for the last 6 months is like there's a lot more to private credit than just direct lending, which is where you see most of the headlines, and that's where most of the kind of concerns have been.

The notion of private investment grade and asset-backed finance broadly has definitely evolved over the last couple of years. You guys have a sizable footprint in that market as well. Talk to us, I guess, a little bit about how you view the TAM sort of like the addressable market in that part of the world. What differentiates Ares' origination capabilities? And again, how does that differ from some of your larger competitors in asset-backed finance?

So first, let's define what we're looking at because, by the way, the TAM is enormous because basically everything that is not corporate. So when we think about the asset-backed opportunity for us, it's about a $50 billion business for Ares and growing. And we target literally 40, 4-0 different subsectors. It's everything from pools of consumer loans to mortgages to equipment finance. It can be music royalties. It can be health care receivables. It can be NAV loans. It's just incredibly broad. And as a result, the TAM is massive.

And the way it's developed as an industry is pre-GFC, this was the domain of the banking sector and some specialty finance companies like CIT or GE Capital that changed in the GFC. And I think as a result of that, the strategy of many managers coming out was just to focus on maybe 1 or 2 of those subverticals. But at Ares, what we've said is we want to be the scale player. So not only have we raised 3 of the 4 largest funds in the sub-investment-grade space there, but we have 100 people around the world originating these loans, but also having a relative value lens. So every day, they have a view, we like this, we don't like that. Whereas if you're just a small subscale single area focused manager, that's really tough to do. So we see that continuing to grow dramatically as banks continue to do less.

Then you have the IG opportunity. So the IG opportunity for high grade is about half of what we do within that business. It's growing. Insurance companies, pension plans want access to IG-rated product, but perhaps has a bit more yield attached to it due to self-origination capabilities than they can get in the more liquid markets. So that's growing significantly for us as a firm as well. I'd say the one health warning is that the fee part and the fee opportunity for the IG market is really a small fraction of what you see in the non-investment-grade market. So for us, we're having a bit of balance, but certainly, the sub-investment-grade business is more profitable.

Yes. And so how do you think about origination in that part of the market, right? Because I think with the sponsor community, it's well established, to understand to your point, it's a little bit more mature. We've seen different asset managers take a different approach to kind of driving originations in the asset-backed finance part of the world. Some would have captive origination platforms that they may on balance sheet or within the insurance complex. You guys are balance sheet light. So how do you approach that? And does that create a differentiation in any way?

So you're right. What we've done is that we have individual team members who might have subspecialties, but they're out in the market talking to other finance companies or talking to the banks about deal volumes and deal activities. What we've not done is have individual large teams simply creating opportunity. You've probably seen that a bit more on the high-grade market. But again, with 100 people around the world doing this, we're not finding any lack of opportunities for deployment.

Got it. Okay. So speaking of deployment, on the last earnings call, you guys sounded pretty bullish on the outlook for the pipelines and deployment within credit broadly, obviously, not just direct lending. We've seen the private equity sponsor community be relatively quiet yet again. I mean, this was going to be the year of -- the year of IPO, the year of realizations and the year of perhaps more deployment. It's been a little quieter given everything that's gone on in the space in the last 6 months. Yet I think a week ago or so, Mike was at a conference, still speaking to like effectively record pipeline in 2Q, 3Q. So talk to us a little bit about where that's coming from? And how do you just expect generally the pace of deployment to unfold within credit broadly through the rest of this year?

So, starting high level, we think our firm is geared towards deployment. In that we're global, we're diversified. We see pockets of opportunity everywhere. And in particular, in credit, I alluded to this before, in the U.S., we have 200 deal professionals looking to make middle market loans.

In Europe, we have 100 professionals. So we talk in Europe, for example, to 1,500 companies each year. So we are well positioned to find opportunities. But your question is, well, are there even opportunities to look at? And the answer is yes. The overall backdrop is rates are 200 basis points lower than peak levels. As a result of that, we're seeing the bid-ask spread for company valuations start to narrow.

And there still is this pressure in the private equity system. We all know the statistics. There's $4 trillion of NAV. It's 32,000 companies with a weighted average life of 7 years that need realization. So what's important to know is even if we look at some statistics, deployment is still robust, because there is still robust levels of M&A. There is robust levels of PE activity. Where is it compared to peak levels matters from our perspective, a little bit less.

The other thing we're seeing is refinancing activity. Whenever a loan is 4 or 5 years of a 6-, 7-year maturity, we're talking about refinancing. The last thing is at Ares, we have 250 direct lending portfolio companies in Europe. We have 300, 400 in the U.S. That creates incumbent deal opportunity for us on the refinancing side, it's financing acquisitions for buy and build. So just overall, actually, we're pretty optimistic about deployment. The one softer spot that we cited on the call was U.S. was a little bit softer earlier in the year, a little bit of Middle East war tensions and some other things. But again, that's starting to come back as well.

I got you. And from a competitive position, has there been any shift in the typical kind of direct lenders that you were kind of bumping up against and running into? And the reason why I ask is, obviously, the retail channel has been a very active deployer over the last several years, and we'll get to retail in a minute. But obviously, that part of the market has pulled back in a material way. Does that create an opening to be more competitive, less competitive across different players?

So the answer is yes. And the way we think about it is, number one, as I started by saying earlier, our firm is not dependent or over-indexed to retail. It's important for us. It's a $60 billion, $65 billion business, but that's out of $650 billion of assets.

Two, our firm has record levels of dry powder, $150 billion, $160 billion that we are ready, willing and able to deploy. It doesn't rely on additional fundraising even though, again, it is refilling as we discussed earlier, too. So we're well perched for deployment and opportunity.

When we look at the overall market, some of our peers who are over-indexed to high net worth and retail do have less capital to deploy. And that's precisely what's created, we think, 50 to 75 basis points of additional spread and fee opportunity, slightly better terms, slightly better documentation in the market. And again, that's partly why we think this is a really nice time to deploy. And by the way, that's, call it, on the direct lending side. We have countercyclical businesses, whether it's our special opportunities business, our secondaries business, doing NAV loans out of our asset-backed business, which also benefit through this period of dislocation and volatility.

Got it. Okay. Well, let's talk about retail in the wealth channel. Obviously, still a really important growth segment for the sector as a whole, you and your guys' peers. Notwithstanding the turbulence in the direct lending part of the market, the rest of the channel seems to be going pretty well. So when I kind of look at infrastructure, when I look at secondaries, when I look at even private equity has done quite well. So let's maybe unpack a couple of these.

First, I would love to get your perspective on kind of the current pulse from financial advisers related to credit within the retail channel, where -- we've obviously seen a lot of redemptions in the first quarter. We're about to see more as kind of the first -- of the second quarter comes around. Gross sales have pulled back in a pretty meaningful way. We've seen subscriptions for now April 1 and May 1 for a bunch of products. What would it take for financial advisers, you think, to reengage more with the product, not even so much from a redemption perspective, but really on the gross sales side because that slowdown has been quite notable.

So remember, our narrative has been that generally within the wealth segment, there's been all this anxiety around the products without any distress. If you recall, when I talked about what we're seeing in our loan portfolios, it's the same in the wealth products. The wealth products are doing what they said they would do. They're hitting the yields that we guided investors to expect. The volatility has been low. So I think to sort of regain that trust to break away from the media's narrative, it's another couple of quarters of continued strong performance with relatively low volatility, again, making those yield payments that the investors expect.

I got you. So it's kind of like time and kind of proof point, right, that this product...

Yes. The reason why we think that, and I think this is also where you started is we still firmly believe that wealth is a growth business. Wealthy individuals are underallocated to alternatives. And in fact, when we think about our product suite, we have 8 wealth products, 2 are focused on U.S. private credit and direct lending. However, the other 6, we have European private credit still growing. So again, the U.S. anxiety hasn't fully ported over to Europe. But we're also, as you said, seeing significant inflows in the other parts of our business, whether those are non-traded REITs, our infrastructure fund just had a huge month in May with $700 million of inflows, our private equity secondaries fund, our sports and entertainment fund. So overall, the guidance that we've given is we still expect our overall wealth business to grow in 2026, and wealth is absolutely not broken.

Right. So just let's double-click on that credit part of the business. It's been, again, encouraging that the gross inflows have been quite strong and the redemption picture has not really deteriorated. Maybe there'll be a little bit more than what we've seen in the last few quarters because effectively it's been almost done. But what's the sentiment on the ground for non-direct lending funds? Are you seeing people actively switch from the credit businesses to others? I might probably have an issue with the idea of somebody switching from senior direct lending to equity, but that's a whole other subject. But infrastructure is a yield product, so that probably works kind of really well in the current environment. So where is the momentum in the investor psyche for like the non-credit piece?

So I'd frame it 2 ways. There's a little bit of rotation. Again, even seeing that, for example, in our non-traded REITs inflows, and that's also on the back of very, very strong performance that they've continued to launch. But there's also a little bit of a thematic interest. When you talk about infrastructure, maybe we'll cover it later, the world needs $4 trillion a year of infrastructure spend. Digital infrastructure is very exciting. Data centers are exciting. That's a trend that investors get behind. They also get behind the sports media entertainment thesis. So maybe there's a little bit more thematic interest in some of these things, so a little bit of rotation. But again, overall, the growth picture is quite attractive.

You mentioned real assets. So let's go there, and we have 8 minutes. I definitely want to make sure we hit on that as well. So the real asset business is, to your point, facing several tailwinds, particularly related to kind of the global digital infrastructure build-out. You've previously sort of identified, I think, $900 billion opportunity for private capital broadly for data centers and digital infra space. So talk to us a little bit how you sort of pursue this opportunity and why Ares is positioned to win there, maybe rope in the GCP, obviously, acquisition and how that's performed so far?

Yes. Sure. So we firmly believe that we are in the midst of a generational CapEx super cycle for digital. The hyperscalers keep upping their guidance on spend. First, it was $600 billion this year, now it's $700 billion this year. And we're sort of seeing this on the ground with existing data centers. The demand vastly exceeds supply. We're seeing pricing power. So again, a lot of the signals are still flashing in the right way. And we know this because the foundation that we have as a firm is very strong. We've been investing in digital for 10 or 15 years, and we've seen the opportunity through our real estate angle, and infra angle through our special opportunities fund, our asset-backed funds, also our secondaries funds in infra and real estate.

So again, we've had this sort of comprehensive investment lens around this opportunity for a long time. But GCP brought us the one missing piece which was we were never in the development business. So now we have a team of 100 technologists who really from the cold phase, they find land, they get power, they get permitting, they lease the facilities and they build them and deliver them. And that's where this $900 billion opportunity lands.

And what that number is, is that the total amount that will be spent on buildings for data centers in the next 5 years, about $2 trillion. But a lot of that will be done by the hyperscalers themselves, but sort of the third-party bid is about $900 billion, which is just a massive number. And we're playing our part in it. We have about 1 gigawatt of facilities under development, and our strategy is really focusing on primary metropolitan markets. We're betting more on cloud development than I would say, AI development, although they are a bit interrelated. And we're also working on opportunities that are not speculative. They're pre-leased with major hyperscaler clients. And again, when we see the demand for those opportunities from a leasing perspective, it gives us real confidence in the mid- and long-term growth opportunity.

And how do you think product development? Because that's a big theme, right? Like it's a theme that you and many of your peers talk about. I feel like there's very little debate that this is certainly going to be an area where private capital is likely to participate. So when you think about the product development within Ares around this theme, what could that look like over the next few years?

So we articulated this a little bit at one of our Analyst Days towards the end of last year. The primary source of capital on the development side will be a large commingled fund. People hear more about that in due course. However, once those facilities mature and sort of the development risk has been realized and the development return has been realized, the next big opportunity there is the yield that's generated through these 15-, 20-year leases with large investment-grade hyperscaler counterparties. So the YieldCo opportunity is massive on the back of that. And that's something we've already seen in our real estate logistics business, in particular, in Japan, where we have both the development operation and the yield opportunity for investors. So I'd say that's probably the next big opportunity for us post maturity.

Got it. Okay. Well, let's zoom out a little bit. We've got a couple of minutes left on the clock. Ares has been one of the faster-growing alt managers. You guys on the earnings call reiterated your targets yet again. You raised your dividends. I think it has grown like 20% this year. So that gives, I think, investors some sort of support and evidence in the underlying growth power of the business and FRE growth for this year and next year. So when you zoom out a little bit and you think about your less established businesses. So think about -- and to Greg's and his team's credit, you guys have a nice slide kind of showing the scaling of businesses that are relatively small now, but could be bigger over time. That list is fairly long.

So if you were to say, hey, over the next 2 to 3 years, investors really have to pay attention to the following 2 or 3 businesses that are scaling now that could be relatively outsized contributors to growth, what should the market pay attention to?

So some we've already talked about, which I'll spend less time on, but I would say all the businesses that I will speak about have really large addressable markets where we think we have a leading position. So the first, again, is asset-backed credit. So within the credit department, that is the single fastest grower, you'll hear more news on some of those developments pretty soon, and we have a market-leading position there.

Just on the digital side, I did want to point out that at one of our Analyst Days again at the end of last year, we said that when we acquired this business from GCP, it was literally the team, they didn't have revenues. So that business was costing us money. However, given the fundraising aspirations that we have, we said in 2027 and beyond, that business will generate $50 million to $100 million of FRE per year. So in terms of a catalyst, in terms of a growth engine, that is a massive contributor. And again, we feel very good about the positioning of that business.

One we haven't really talked about is the secondaries business. So we acquired a secondaries platform, one of the largest 5 years ago. We've now doubled the size and profitability of that business. It's now a $40 billion business within the firm. It focuses on basically every vertical, private equity, infrastructure, real estate and now credit secondaries. And interestingly, a lot of the angst and anxiety in the private credit markets has led to a big opportunity for our credit secondaries business.

So again, it's not only LP positions. It's now continuation vehicles. And it's also helping some of the semi-liquid vehicles evaluate their own capital needs, too. So I'd say broadly, these are derivatives of the primary markets and have a lot of catching up to do compared to private equity, which is probably the most mature. So I'd say secondaries is the last one to keep your eyes out on.

Yes, secondaries in private credit definitely feels -- it's got some real...

It definitely does.

Yes. Okay. Last question for you. I wanted to touch on M&A. You guys have been acquisitive over time. I feel like over the last couple of quarters, the sort of focus on private equity as a potential area of inorganic growth for Ares has been coming up more and more. Maybe talk to us a little bit about what that could look like. Obviously, there's a lot of fragmentation in private equity world today. Would you be looking to add inorganically something that has a lot of scale or something that's a little more niche? Does it need to be solely private equity or some of these businesses could obviously come with other asset classes? And what's your approach to that kind of inorganic opportunity?

Yes, good question. I think we told the market was that, in general, '26 for us was a year to digest GCP further. So I don't expect anything immediately. But that being said, we have a $25 billion private equity business. We like it, but it's subscale compared to the rest of the firm. And we like private equity over the long time frame. And interestingly, in a challenging market, you can see who's investing, who's giving their investors DPI, who's raising capital. So in a tough market, you can see who's differentiating.

And when we think about what it could bring to Ares, it would help us definitely enrich the dialogues with our existing LP base because private equity is probably one of their largest exposures, one; two, lots of synergies with our direct lending business, which, again, has such a broad list of portfolio companies; third, financial characteristics of private equity from a margin perspective, attractive. And last, but certainly not least, it will help, I'd say, enrich our relationships with the Street.

When you look at how our peer firms generate capital markets revenues from their private equity portfolios, it's a real opportunity for us. So I would say we're not in a rush. Certainly, there's a limited kind of buyer pool. So we're looking hard. That being said, to answer your question, doing something, I would say, in scale that kind of moves the needle is most attractive for us. But getting it right is the most important thing. And to do that, making sure you're aligned on culture, on governance, in addition to having conviction that's a great manager is all incredibly important. And that's not a decision that you make over 1, 3, 6 months. It can take years of courtship and really getting to know the counterparties to make sure that it's right for everyone. So again, interesting for us. It's definitely on the radar screen, but certainly not a make or break for our firm.

Got it. Okay. Well, with that, we're out of time. Blair, thank you so much. It's a pleasure to host you here.

All right. Thanks, Al. Thanks, everybody.

Good morning, everyone. I'm Patrick Davitt, the U.S. asset manager analyst at Autonomous Research. It's my pleasure to welcome back Ares CEO, Michael Arougheti.

As a reminder, if you want to ask any questions, I'll try to throw them in. You can submit them to the Pigeonhole app, and I get it right here on the iPad, and I'll try to sprinkle them in as they come in.

Thanks for coming, Mike. Nice to see you again.

So it feels like a broken record every year at this event with a new bugaboo in the industry. So as I usually do at the event, particularly since we have most of the major alts here, I want to start with some higher-level macro questions. So it's been a crazy few months, got an Iran war, big private credit freak out and now concerns around sticky inflation, higher for longer rates and slowing economic growth. and even some higher probability of stagflation we hear.

So from that seat, the mix seems pretty toxic for levered assets like private equity in particular, but maybe incrementally positive for pockets of private credit. Do you agree with that view? And what is your current thinking on inflation rates in the economy and then Ares positioning within that mix?

Sure. Freakout and toxic, maybe a little more hyperbolic than I would say. But I think you do highlight the challenge in the markets is we are getting thrown a lot of different things at once. Last year, we dealt with tariffs. This year, we're dealing with geopolitics and wars and oil supply shocks. So there's a lot to navigate. The one thing I would say at the outset is, obviously, as a private markets manager, we need to be macro aware, but we're less reactive to gyrations in the markets.

And while rates are a big driver of the business in certain corners, the diversification of our strategies, I think, allows us to continue to grow profitably in any rate environment. Whenever we talk about the economy globally, we always go right to our primary information. One of the nice things about our size at $650 billion of AUM is we have investments in over 3,000 middle market companies. We own close to 1 million square feet of industrial real estate around the globe, a very large participant in the digital infrastructure market.

And so we're seeing things real time on the ground. And what we're seeing in the portfolios, at least up until this point is continued strength fundamentally. Our portfolio companies are growing 9% to 12% depending on the geographic region. It's pretty broad-based. Our real estate portfolios, we're seeing high utilization rates. We're seeing strong on-the-ground rent demand and NOI growth.

So a lot of what we're seeing in the trade markets in terms of the earnings momentum we're seeing in our private portfolios as well. So I think the anxiety around persistently high rates and inflation is probably well placed, but it's not yet showing up. In terms of what it means for our individual portfolio, generally speaking, rates are going to affect cap rates and multiples in equity, as you mentioned.

That being said, I think anyone who is investing in equities with a view of capturing multiple expansion is probably not investing for the long term. So whether we're talking about our real estate portfolios or our corporate equity portfolios, it's all about cash flow growth, NOI growth, underwriting real fundamental demand drivers and then hoping for the right multiple outcome over that 5- to 10-year whole period.

So you have to really think more about what does it mean for your income on the ground. I think the good news is a lot of what we do, broadly speaking, is in and around private credit markets, direct lending, real estate lending, infrastructure lending and all those flavors. Those investments are based off of floating rate short-term interest rates. And so generally, what we've seen is as the short end moves higher and if it stays higher for longer, it tends to benefit those portfolios in the form of higher rates of return.

And so to the extent that rates stay where they are or go higher, I think it would really deliver outperformance in the floating rate private credit book, which is a big part of what we do. I think the other nice thing is if you look at the trajectory of rates historically, these portfolios were already underwritten and managed through significantly higher rates. So when you look at the interest coverage ratios and the debt service positioning of those underlying borrowers, they've kind of already been through a rate environment that was 200 basis points higher on the short end.

And so I think we're well structured to withstand a higher for longer environment. My own view, I think we should price for higher for longer. I think the market has historically been lagging that understanding. But you mentioned we've got oil supply, we've got fiscal deficit spending, we've got AI CapEx, increased energy prices. There's just a lot that we need to work through to get back to a place where we're talking about meaningful reductions in the rate environment.

The only other thing I would add vis-a-vis how private credit performs, you tend to see significantly lower refinancings just because of the rate positioning in the existing book. And so when you think about how we make money as an asset manager to the extent that you're seeing less refinancing and more durability in the book, that tends to mean that you're going to generate higher management fee income.

So you touched on this. The press obviously is still kind of hyper focused on direct lending specifically. But if we do potentially get a slowing economy and rates remain high, where do you see the biggest risk of something breaking in private credit broadly? Or is it -- or do you think this concern and attention should be focused elsewhere entirely?

Yes. You called it a freak out. I would say it's maybe a misunderstanding.

Right.

I think the misunderstanding is the bulk of the private credit markets are underpinned by private equity markets, whether it's corporate private equity, institutional real estate owners, institutional infrastructure. And so if you're going to be talking about losses in private credit, you kind of have to think about what does that look like for the institutional equity markets. And what does it mean broadly for the other traded markets.

So it's hard to conceive of an environment where private credit, broadly speaking, is taking on significant losses and it's not showing up in other parts of the market. So that to me is a little bit of a disconnect. To put that in perspective, our direct lending portfolios, which is a portion of our private credit business sit at roughly 40% loan to value, which means that there's 60% of the capital structure owned by an equity partner who is obviously economically incentivized and aligned with us to make sure that there's a full recovery of the entire $1, not just the $0.40. That is significantly more equity subordination than has ever existed in the private markets.

It's a commentary on private equity and institutional equity behavior in a lower rate environment, expressing itself as higher valuations. And so that cushion is going to be a significant mitigant to default and loss. We also look -- and when I say you can't just look at private credit in isolation, you can look broadly across the credit markets. The loan and high-yield market are not showing any signs of meaningful stress.

If you were to look at bank earnings and just look at the credit portfolios across the bank universe, consumer, credit cards, auto, you're just not seeing it. We're not seeing it in our private credit portfolios, too, which is why it's a disconnect. Our direct lending portfolio today sits at a 2% nonaccrual rate at cost and about a 1.2% nonaccrual rate at fair value because we mark those assets to market. That is lower than historical averages. We have actually seen modest improvement in those metrics year-over-year. So if you were to look at this time last year versus this time this year, we've seen modest improvement. So we're -- back to my comment about what we're seeing on the ground, we're not seeing it. So I appreciate that there's some future anxieties, but it does feel a little disconnected from what we're seeing on the ground.

And to your point that the portfolios have already absorbed the rate increases, it would stand to reason that the refinancing risk is really in portfolios that haven't.

Yes. And I think I would think of it as a refinancing opportunity, not a refinancing risk because remember, these are floating rate instruments. And so to the extent that rates float up, it's going to mean that you're going to get less refinancing in your portfolio, which means the gross to net changes. So typically, what happens is if rates are coming down, transaction volumes pick up, your gross deployment increases, your net deployment moderates. To the extent that we're in a higher environment, it impacts transactions, then gross deployment goes down, net deployment goes up. And that's kind of how you view.

Yes. Makes sense. So software is the question within this theme that's particularly tough for a lot of people to answer. So could you update us on the trends there? And to what extent you have any incremental views on how much of your software portfolio could be more at risk from AI disintermediation?

Sure. Again, I think it is altogether appropriate for anyone investing in any market, not just private credit to be thinking about and to have been thinking about for a long time what the risks and opportunities from the implementation of AI are going to be. So one of the things, again, that's a head scratcher for me is it's as though the markets woke up 3 months ago and said the private markets, which represents where the GDP growth is and has been and is going, has exposure to technology transformation.

So I think the first thing, again, is I don't know that it's fair just to think about private equity and private credit exposure as a risk and not an opportunity and to detach that part of the market from everything else that's going on around us, I think, is a little too narrow of a focus. The way that we have thought about it, and this is getting expressed in the traded credit markets as well, is the market is absolutely differentiating appropriately between enterprise systems that have entrenched market share, real competitive moats that get created either because they're in regulated markets, they have proprietary data.

They have an understanding of complex work streams and the barriers to switching are frankly too high. They're in parts of the market that require 100% accuracy, 0 failure. And if you start going through those -- checking those boxes, you're going to find that there are software businesses that will be meaningful beneficiaries from the implementation of AI within their existing product, and then there will be parts of the market that will get disrupted in places like content creation.

If you look at the traded market, just as an example, the enterprise entrenched software names are now trading at about $0.98, $0.99, up from $0.94, $0.95 when everyone started talking about the SaaSpocalypse. And the names that are at higher risk of disruption are trading $0.80 or less. So in that market, I think people have gotten better at differentiating. And I think the private markets need to go through that same exercise of understanding the exposures and who will benefit and who won't.

To try to help that, we actually went out with our software portfolio, which represents about 8% of our private credit book and about 11% of our direct lending book is exposed to some part of the software ecosystem. That's about 135 names. And we gave our files to a very large consulting practice that is partnered with one of the large AI businesses to effectively re-underwrite our portfolio, which we're constantly thinking about active portfolio management.

And their determination, we talked about this on our earnings call, was 86% of our software exposure in their opinion, which aligns with our high conviction view was in what they would call that top bucket of companies that have real competitive advantage and will likely benefit from AI implementation. About 13% of the portfolio, they put in a middle bucket, which was market-leading businesses, real competitive advantage, but need to continue to invest in their AI transformation in order to maintain that incumbent advantage; and 1%, which represents 3 portfolio companies that they felt were at high risk of disruption.

So going through that exercise, we feel really, really good about those exposures. Similar to my comment earlier, they sit at about a 40% loan-to-value. That's actually up from about 37% because we've been marking down the equity value in those companies as we think about where we sit in the capital stack. Cash flow in those businesses is growing about 9% year-on-year, which is consistent with the broader portfolio mix.

And importantly, going back to this loan to value, the weighted average maturity of that portfolio, which I think is probably consistent with other industry participants is about 3 years, 2.9 years, which means that you're going to be at the table with that 60% equity owner within 3 years from now. And that's when this will get resolved either in the form of a shared view that this company is growing, a divergent view where you're either going to get refinanced or paid down or a view that the company is not successful in which case the credit would effectively take over that equity and play for some of that equity upside.

So this is going to play out over years, not months. I think you have to really start getting into the habit across all of these markets of understanding exactly what the competitive levers are to pull in these businesses, but we actually feel really good about what we own.

The more cynical -- on that point, the more cynical investors I talk to kind of point to that kind of -- it feels like a bit of limbo state that we're in because we have to wait that 3 years. Are there any levers you can pull ahead of that? Or would you just really need to let it play out?

I think that if you're an equity owner, you have a lot of levers to pull because you're either out in front and you've got to continue to make investments to maintain your competitive advantage or if you're at risk, you've got to transform your business quickly. I think in the credit markets, given how high up the capital structure you are, there's very little that you're incentivized to do other than to let equity valuation play out below you.

To the extent that someone wants to come talk about loan modification or maturity extension, it is going to be very, very expensive to make those types of accommodations. And my guess is most owners of these businesses are going to find a better use of capital investing in transformation than investing in higher debt service. So I do think that this is going to play out over time.

And if we get to a market where you're neither refinancing nor walking away from the company, the rate of return on that book is going to go up dramatically as well. And I want to make one last point because I think it's maybe misunderstood. If there's 3 years left of weighted average maturity, that probably means you've owned these companies for 3 years up until this point. In the eyes of the institutional owner of the private credit, that means that by the time you get to that maturity date, you will have gotten back 60% of your capital.

And so even if, which I'm not suggesting would happen, even if you had a loss on the loan through the eyes of the IRR since inception, it's not going to have a meaningful impact on the inception-to-date IRRs for those portfolios or for that asset class. And so while people are paying attention to it, I think the durability of the return in the market is still going to play through.

So to your points on the strength of the portfolio, your BDCs made a statement yesterday with a new bank line re-up. Could you kind of speak to the genesis of that? Was it purely meant to be a signal to the market? Or how did that develop?

No. We are obviously a very large counterparty to the Street and the banking community, borrowing across the vast majority of our strategies, either at the portfolio company level or the portfolio level. Typically, every year, we will go back into the market to extend the maturity of our existing credit facilities to make sure that we have 5 years of duration at all times to the extent that we can get it and to use our scale and performance to drive better terms and pricing.

So the announcement yesterday was ordinary course, but I think illuminating in terms of what's going on in the market. We've effectively extended duration in our credit facilities for our traded BDC, ARCC. We upsized that by about $150 million to get it to $5.5 billion, and there's a $2.7 billion accordion on that facility. And then for our non-traded BDC, which is in the wealth channel, which is where some of the noise has been, we upsized that facility by about $850 million to, I think, $4.1 billion.

There's 40 banks in that first facility, and I think 30 banks in the second. And in extending the duration an extra year to 2031, we got a 10 basis point price concession. So our duration extended and then the cost of that capital came down. So when you just think about perception of risk, I think it's a good indicator that at least from the perspective of the banks who are coming in and underwriting these portfolios, they're seeing something that's divergent from some of the noise.

I think it's also an indication with the changed regulatory bank capital frameworks, there's an anxiety in the market that banks will now be more aggressive competitors directly with private credit managers. I think what actually is going to happen is they will become more aggressive portfolio lenders to the large players in the market. And so I think it's also an indication that with the new [ rate cap ] frameworks that's actually creating more demand for this type of lending within the banks as opposed to having them compete directly with us.

Great. I want to move to deployment and competition. This tug of war between the BSL market and the direct lending market continues to be a key focus for investors. But your commentary on the 1Q call suggested a better pipeline developing. So through that lens, how has that been tracking through May? And have the better dynamics kind of continued?

So on the call, when we were talking about the pipeline, we were talking about the aggregated pipeline across the entire Ares platform. So I'll try to break that down. In terms of the direct lending pipeline, one of the things that we try to articulate as a differentiation for us is we cover the broad segments of private credit, small market, middle market, large market and then all the real assets lending, as I said earlier.

This tug of war, as you described it, between BSL and private credit is really happening at the upper end of that market. And so when the broadly syndicated loan and high-yield market are open and risk on, you may see some market share give at the upper end, but we're still deploying through the other parts of the business. And we also have a very significant syndicated loan and high-yield asset management business. We're one of the top CLO managers. And so when the BSL market is taking share, we benefit through CLO formation and growth in that part of the business.

Q1 pipeline was actually slow or activity was slow in U.S. direct lending. We are seeing that pick up now. And similar to what we saw last year with the tariff tantrum, I think you can envision a world where if we get through some of the geopolitical issues here that, that pipeline would convert in Q2 and Q3. Putting the U.S. direct lending pipeline aside, we've seen real strength in places like ABF and alternative credit, all parts of our digital infrastructure business, both equity and debt, secondaries. So the nice thing about the way that the business is constructed, given the diversity of strategies, you're seeing the pipeline in an -- aggregated pipelines growing even if you see pockets of weakness in one business.

There was also a sense that the spreads and terms for direct lending specifically were tracking much better, but it feels like liquid markets are more open at this point. So has that trend stalled? Or does it still feel like you're getting better terms on the pipeline?

We're absolutely getting better terms. And one of the benefits of the noise in the market and some of the outflows in wealth is you're seeing less competitive pressure in the market. So we've been able to pivot all of that deployment to our institutional franchise, which is the bulk of the business, and we're doing it now getting 50 to 75 basis points incremental spread, similar number probably on fee, 0.5 turn to 1 turn less leverage on new investments and better documentation terms.

So it has gone from maybe a borrower-friendly market to a lender-friendly market, and that's a good place to be. We have not seen it tightening from there. So it's stabilized there. The broadly syndicated loan market has some technicals where there's probably more capital looking to deploy in that market than flow. And so that market has been tightening and you've seen good performance there, but we're just not seeing that spill over into the private market.

Good. So let's expand the private credit window. You and others have pegged the opportunity set kind of expanding to the tens of trillions. Everyone has a different number, largely on the conclusion -- or the inclusion of asset-backed to your point. So higher level, how much of that supposed tens of trillions do you think is really addressable for the alternative managers and Ares specifically?

A lot of it, but you have to -- when you think about asset-based finance, you have to think about it in terms of investment grade and non-investment grade. The investment-grade market is significantly larger, but it is significantly more competitive because you're going head-to-head with insurance companies and banks and the securitization markets. It is lower fee and so has a different profit profile versus the sub-investment grade market, which is where we have focused most of our attention.

And I think we are the largest player in the non-rated parts of the ABF market. We've raised 3 of the 4 largest institutional funds in that business, and that's been a big, big growth engine for us. I think you want to have both of those operating side by side. It just makes you a more relevant counterparty to potential borrowers. It makes you a better counterparty to the Street. It gives you the ability to play relative value between being an owner of assets or a lender to the assets.

And so we're kind of about 50% high grade, 50% sub-investment grade. And that's probably a good mix for us. One thing that I think gets lost when we're throwing out these huge TAMs, the fees on sub-investment grade when you include the opportunity for incentives, et cetera, is probably 8 to 10x the high-grade part of the market. So if you have a $50 billion sub-investment-grade franchise, that would equate to about a $500 billion high-grade franchise. So you can get really excited about big numbers, but I think they're just fundamentally different businesses.

But theoretically, that's all accessible, and we do know from our experience in other parts of private credit that the value proposition to buyers -- to borrowers borrowing in the private markets is real. And so it's not surprising that that's finding its way into the high-grade markets, too.

On that point, a lot of observers in this world have talked about what has been a longer education process for that asset class relative to, say, direct lending in the institutional channel. Where are we in that education process? And given the ongoing volatility, is there any sense that, that could accelerate interest in this as a potential risk mitigant?

Yes. We -- it's a complex asset class. I mean if you look at the way that we approach it, we have specialists in 40 subsegments of asset-based finance. So if you really want to do this business well, you have to have deep structuring capability, but you also have to have real understanding of all of these sub-asset classes that make up the asset-based finance world. A lot of that capital and talent used to be in the banking system.

And post the GFC, that securitization apparatus kind of exploded and found its way into the world of specialty finance companies. And so we and others have now been going out and kind of reaggregating that talent and that capital. And through that reaggregation, we're now able to talk about asset-based finance in, I think, an easier-to-understand way because we're talking about it in terms of big themes, similar structures, similar cash flow profiles as opposed to what used to be is you have a $200 million fund manager who does litigation finance or a $500 million fund manager who does equipment leasing.

This reaggregation has really institutionalized the asset class in a way that has made it very appealing to the institutional community on both the high-grade and sub-investment grade side of the business. So I think there's a lot more awareness now than there was 5 years ago for sure, but people have accelerated and gotten up the curve pretty quickly.

Great. So through the lens of ABF, insurance is a channel that's been early to adopting that as a core asset class. So could you update us on your insurance strategy through the lens of how the partnership with Aspida is evolving?

Sure. So Aspida is a de novo insurance company that we started building in earnest a little over 6 years ago. We put up $500 million of our balance sheet alongside third-party capital. We own less than 25% of the equity of the insurer today. The way that it is structured is it is both a reinsurance platform and an annuities platform.

So we're growing our liabilities through the sale of annuities and reinsurance relationships. The growth has been phenomenal. Today, at the end of 2025, the balance sheet was about $30 billion. 2021 is about $2 billion. Last year, 2025, we grew our premiums by $8.8 billion. If you go back 5 years, it was probably $1 billion. And so that's depending on how you want to look at it, 60% to 100% growth in the underlying financial metrics of that business.

We are out with guidance that we gave at our Investor Day that we would expect the AUM for that business to be $50 billion by the end of 2028. So if you look at $30 billion at the end of last year with 3 years to go, you're kind of in a good place there. We have about $1 billion of investable capital, which would translate to about $10 billion of incremental balance sheet, and we're reinvesting the earnings as they compound.

So we couldn't be happier. And nice thing about doing at de novo, it didn't come with any legacy back book or challenges. It's a completely new tech stack. So we're not dealing with any antiquated systems issues and the interface with the insurance community is pretty seamless and unique. So we don't talk about it probably as much as maybe we should or we could because it is one part of a very large business.

We have tried to take a differentiated approach of being balance sheet light, staying true to our positioning as really just an asset-light manager of assets, whereas I think some of our peers have probably leaned in a little bit more heavily to owning those insurance companies outright. And that just, in my opinion, presents a different financial profile and set of risks and potential opportunities that we've tended to structure around.

So in this kind of retirement umbrella, there's seemingly a light at the end of the tunnel for the alts and 401(k) opportunity. So firstly, do you have any updated thoughts on how quickly you think that adoption could ramp up? And within that, maybe update us on how Ares is positioned to be relevant for that channel.

Yes. I want to make a comment on it first, which is similar to what I've said publicly about the wealth channel, which is $1 in wealth is the same as $1 in the institutional market and $1 in a DC plan is the same as $1 elsewhere. So the constraint to growth for somebody like us is going to be, can we actually source and manage assets around the globe, not how much money we can raise and where do we raise it from. So when we think about opportunities in wealth, opportunities in insurance, opportunities in defined contribution, we think of it through the lens of diversifying our capital raising, but not necessarily transforming the business. So we're excited about all of those, but we tend to get maybe a little less enthusiastic because the real focus has been building these durable origination and portfolio management engines.

So all that being said, I think that we are making progress. The executive order helped move things along. It has enhanced the conversation within the regulatory bodies that matter. But I think given some of the concerns that you're seeing pop up in wealth, it's slowing the process down. So I think it had a lot of momentum, and that momentum has probably slowed a little bit. We have been preparing for this, as you would imagine, by working on our product set.

So we have products that are ready to go to the extent that it moves in that direction. We have distribution partners lined up to the extent that it happens. But if it doesn't happen, that's okay, too. Obviously, we're focused on making sure that the institutional franchise will allow to -- for the deployment to come on to the platform at a high fee and a high incremental margin.

I want to move on to some of your other businesses, starting with secondaries. It feels like this could once again be a sweet spot year for secondaries. Sponsors are still struggling to sell legacy positions. Many GPs are feeling pressure to get more liquid. So I think you're one of the better positioned managers for that given your Landmark acquisition, I think, 5 years ago. Are you seeing these trends translate to significantly more deal flow? And is LP demand forming around that at the same scale?

Yes. Yes to both. We made an acquisition, which has now been obviously fully integrated and scaled of really the pioneering platform in secondaries. Since our acquisition, we've doubled the profitability and AUM in that business and are now seeing meaningful growth accelerating into this trend. And the trend is the installed base of private equity right now is $3 trillion to $4 trillion depending on how you want to slice it against $1 trillion of uninvested capital. And with the deal market not picking up to the extent that people thought, secondaries is one of the main ways that people are navigating the return of capital to the private equity community.

So we've been a big beneficiary of that. But we've also seen as the primary installed base of real estate infrastructure and credit has grown and continues to grow, those parts of the secondary apparatus are growing, too. And probably the most exciting trend that we're investing behind in the market is the shift from LP-led secondaries, which is simply LPs selling portfolios of funds at a discount to NAV to what is now GP-led, which is close to 50% of the deployment in the business, which is the asset manager themselves using structured solutions in the secondary market to capitalize their management company or affect some kind of repositioning within their portfolio.

That's a fundamentally different skill set than buying portfolios. It tends to skew much more towards asset level underwriting and obviously requires a deep set of trusting relationships with the global GP community. And so if you look at Ares' positioning, it's probably the largest coverage team of GPs in private equity and real assets, we're uniquely positioned, I think, to take advantage of that shift to GP-led.

Within this theme, there's been a lot of focus on the practice of day 1 markups. So firstly, where do you stand on that debate? And secondly, how much is Ares secondaries performance dependent on day 1 markups?

I don't know if everyone understands, but I can just describe it. So it's funny that you called it a practice. So GAAP requires that if you buy a portfolio of funds at a discount to NAV that you mark it up to NAV.

Okay.

So that's not a practice. It's actually the GAAP requires you to do that. And the reason I think that it does is everyone else who owns those assets is carrying them at NAV. The fact that someone sold them at a modest discount to NAV doesn't necessarily change the fact that the market is valuing them at NAV. And two, because NAV bounces around, it's actually hard to use a convention where you would amortize that over the life of an investment.

So the accounting principle is mark it up and capture that value. So I don't think there's anything nefarious going on there. I wouldn't even call it a debate. I think it's really the accounting convention. And so if the accounting -- if FASB decides to change, then the industry would change around it. In terms of where it shows up for folks like us, the bulk of our secondaries actually is getting done in institutional funds that get paid on what we call European-style carry waterfalls, so end of the fund life.

So it's not really relevant there because you're only getting paid the incentive fee to the extent that you get through to the end of fund life. Where it shows up is in the perpetual vehicle part of the market, the wealth channel. And there, we have one fund called APMF. It's about $3 billion and about 58%, 60% of that portfolio is LP-led. So that's where you would see it within the Ares context, so less than 10% of the AUM.

And referring back to my comment about investing in growth of GP-led, that's not a thing in the GP-led part of the market. So I think as we continue to see growth in the GP-led part of the market, and we begin to see more of those exposures show up in places like our perpetual capital vehicle, I think that 60% number will come down over time.

Makes sense. Let's move to AI and infrastructure. I think we're now a little over a year since you closed the GCP acquisition. So I think it would be helpful to start with maybe an update on the integration, how that's progressing and what you see as the biggest opportunities for Ares as you move forward with this new platform.

Yes. Integration has gone frankly, better than we could have hoped it would, both from a cultural and operational standpoint, but also from the ability for us to add value to the acquired platform. We have been acquisitive. I think, as you know, 20% of our AUM growth has largely come from transformational acquisitions like GCP and Landmark, 80% organic. This one was unique in the sense it brought us 2 big businesses that were, one, complementary to what we did already and two, opened up new global markets for us.

The first being their Japanese real estate business. So with the acquisition, we acquired one of the longest-standing, I think, best-performing real estate businesses in Japan that has a traded and institutional franchise that we think is incredibly valuable and an interesting growth perch for us in terms of our growth in the Japanese market and the rest of Asia. And a data center development business, which came with an 85-or-so person data center development team that was largely hired out of industry from all the hyperscalers and a pipeline of in-flight large-scale data center development projects that we've now been forming capital and investment management teams around. So both of those highly transformational assets and again, probably going better than we hoped and underwrote.

On that, there's still a lot of concern that there's not going to be enough revenue to support the amount of CapEx being deployed. So how are you, Ares, structuring these investments for tech from that risk?

Yes. So -- and again, this goes back to my software comments that it's not as simple as all data centers are one thing or that all AI businesses are approaching their growth the same way. The way that we have thought about it is we want to do pre-leased large-scale projects in key metropolitan areas. So Tokyo, Osaka, London, Sao Paulo, Northern Virginia that are powered that have 12- to 15-year leases with an investment-grade hyperscale counterparty with inflation escalators.

We do not want to take speculative CapEx risk. We are not taking technology risk in speculating on GPUs. So these are effectively large powered shells that are getting to the front of the line in the lease SKU because of the quality of the location and the speed with which we can bring them online. So I think for now, what we've tried to do is say, focused on baseload cloud computing in metropolitan areas with hyperscalers with the option for AI growth. And we've largely on the development side been avoiding LLM training in secondary and tertiary markets and non-hyperscale quality counterparties.

Great. So expanding further to real assets broadly, I think people are often surprised that your AUM exposure to real assets is pretty close to your direct lending exposure, a little over 20%. So it gets less attention, obviously, given the noise in direct lending. So aside from AI infrastructure, which we just hit on, could you expand on the opportunities you're seeing in your broader real estate business?

Yes. Real estate is an interesting place. I mean -- and I appreciate you bringing it up because I think people think of Ares as a credit-first manager, and that's largely historically been true. But when you look at the growth in our real estate and infrastructure businesses, they're obviously starting to catch up. And that's been years and years of intentional business building and adding of talent and product and capability around the globe.

Today, if you look at our real estate business, we're probably the third largest institutional manager of real estate in the market. We have stayed focused on multifamily and industrial real estate for the most part. So largely avoided office, largely avoided retail, largely avoided hospitality. And we've taken the approach, which we think is differentiated that we want to be vertically integrated in those businesses.

So we want to develop or at least have the opportunity to develop our own product because, again, in a world that is asset constrained, one of the ways that you differentiate and capture excess return is through the development of your own real estate. We have built businesses in adjacencies to industrial and multifamily, so places like self-storage, student housing, where we can leverage those capabilities, but again, create some differentiated exposures for our investors.

And similar to what we do on the corporate side of the house, we're doing it equity and debt. So we have the full complement of capabilities from owning the asset to lending to the asset and all things in between. We're really excited about the positioning of the business and where real estate is cyclically. If you go back and just look at how the real estate markets generally have performed through the rate hiking cycle, basis is down about 20%.

And so history would tell you that if you are entering the real estate market when basis has reset 20%, you're typically going to capture 400 to 500 basis points of excess return for the next part of the cycle. So we think that in this moment, there's an opportunity to own really interesting real estate at good prices and an opportunity to now come in as a lender to real estate with reset basis. So we're spending a lot of time continuing to grow that business.

On the infra side, obviously, a lot of attention, as I just mentioned, being focused on data center development. Those are huge TAMs and really big capital and capital deployment numbers. But we have a very large infrastructure lending business. We're probably one of the largest lenders to other infrastructure managers, similar to our private equity lending business. We have a very large renewable energy and energy transition practice. And so we're trying to attack this digital infrastructure transformation from all sides of the capital structure and all sides of the project, from the energy to the building to the transmission surrounding it and everything in between.

So I'm not going to let you get out of here without talking about retail. We got close. It's a smaller issue for you than others, but obviously top of mind given the news flow and the retail flows we can see. And it looks like the gross flow picture, particularly for direct lending products is tracking much lower in 2Q versus 1Q. So what are you hearing from distributors on the demand algorithm for direct lending and the broader retail suite?

Yes. So I want to cover this from a couple of different angles because I think it's again, it's probably misunderstood. First thing is the outflow picture in wealth is largely in U.S. direct lending. So if you look at Ares' positioning as kind of a top 3 participant in that market, we have 8 products in the market. We have 2 U.S. private credit funds. We have a European private credit fund, 2 real estate funds, a sports media and entertainment vehicle, a secondaries fund and an infrastructure fund.

The way that you should be thinking about the opportunity in wealth, and we saw this with real estate a couple of years ago, is the large platforms and the large adviser platforms, whether it's the Morgan Stanleys of the world or the RIAs are meaningfully underallocated to alts. So the tailwinds for increased allocation to alts is intact. To put that in perspective, in the first quarter, Ares saw $4 billion of inflows onto the platform, gross, about $3 billion net, and we saw largely moderated outflows in everything but the U.S. private credit funds.

So interestingly, European private credit, we saw a $1.2 billion inflow in the quarter. So it is isolated. We are growing through that trend. And I think this is an opportunity for the incumbents to capture share in wealth because I think there are people who are maybe over-indexed to wealth that will not be able to grow through this step back. And because of the disproportionate size of our institutional franchise, all that's really happening in those private credit funds is the deployment is shifting into the institutional funds with no impact on our profitability.

And so what that means is we'll be able to capture more share of the private credit deployment opportunity at higher rates than the people who are shrinking because they're over-indexed to retail. I would expect it to continue. Don't know how long it will go. What is interesting about it, if you look at the underlying performance in these funds, there's nothing in the performance that would indicate that people should be wanting out of these vehicles. I think they were underwritten with an expectation of making an 8% to 10% return. That's what they're doing.

Credit performance is strong. If you look at our nontraded BDC as an example, I think we have 2 companies on nonaccrual. So relative to that 2% -- 1% stat I quoted earlier, meaningfully better. We've also noticed a little bit of a trend where some of these redemption requests are coming from non-U.S. geographies and institutional and small family office investors as opposed to what I would call well-advised wealth.

And that's why going back to my primary comment, I think for the well-advised high net worth investor, they're continuing to allocate through this. So my expectation is that our guidance on growth for wealth is intact and that the redemption queue will resolve itself. But in the meantime, that demand for alts will just find its way into other parts of the market.

You mentioned institutional, and it sounds like from the messaging on the call that institutional demand for direct lending and private credit more broadly could actually be improving through the volatility. Are you still seeing that trend continue through May? And perhaps use that as an opportunity to expand on how the institutional conversations have been tracking through the volatility.

I think they view this as a huge opportunity. So as we talked about on our call, we had a meaningful closing at the hard cap on our opportunistic credit fund. We are in the market with significant momentum with our institutional ABF fund. And because of this demand, we've actually pulled forward the fundraising for our large U.S. institutional loan fund. I think the institutional investor views this as an opportunity to capture that extra 50 to 75 basis points of return that I referenced earlier.

And they tend to be much less what I'd call, reactive to moves in the market. Private credit for them is a core allocation. They want vintage capture. So they want to be investing through all the pockets of volatility. And going back to what I said earlier, they're happy with the performance. They've captured all of the upfront return that came from higher rates. Credit performance continues to be strong.

And so when they look at even the potential for underperformance which I don't know that they are, but similar to my earlier comment, they're still going to get an inception-to-date return at or above what they underwrote, which is causing them to continue to allocate. And I think if we continue to see disruption in the wealth market, you'll see the institutions come in dramatically, at least for the larger guys.

So maybe to sum, taking all what we discussed here, I think it's worth highlighting that Ares has not seen really any impact on its organic growth through the volatility this year, the volatility last year, the volatility of the year before of that. So you reiterated your FRE growth guidance on the call. So what is about your business you think that has made the growth algorithm so sticky relative to even your comparables over the last few years?

Exceptionally strong senior manager. I think the -- it's interesting because if you look at the historical growth of the business -- we've largely been growing at a 20% CAGR for as long as I can remember, and we grew faster through the GFC and faster through COVID than in any other moment. So it does speak a little bit to the countercyclical nature of the growth algorithm.

The easiest way to just think about this is, number one, as I said, this is an asset-light asset management business that is owning assets with long duration with compounding earnings and compounding fee. So if you just think about the $650 billion that we manage, it's in hundreds of different strategies around the globe, highly, highly diversified, highly granular. Some operate countercyclically, so you don't see big drawdowns in the business, but it's growing through volatility because these are private assets that are not getting traded and dramatically marked down.

And to the comment on institutions, the institutional market tends to give us capital countercyclically. So we tend to see people look for an opportunity to play volatility with us when the markets get choppy, and that's why we're able to grow through it. The other thing structurally that's important is because of the institutional franchise, we're typically running with about 25% of our assets under management uninvested.

So if you were to look today, we have close to $160 billion of capital that we've already raised that is available for deployment. And the way that we generate management fee and FRE is through the deployment of that capital. So we know now, and this is why it's a linear growth profile that just through the deployment of what we've already raised, we can largely hit our growth objectives.

And so it's not as though we have to go back into the market and convince them that they should give us capital to invest into volatility. We already have it. And then to my comment, we don't really have rate exposure. Most of our credit assets are floating rate, and so we're not getting hit with a rate mismatch. We don't have any kind of asset liability mismatch where you could see capital leaving the platform.

We tend to run low leverage, so we don't see amplification of risk when the markets get choppy. So you can kind of see a pretty clear growth path to the results, which is why we've been comfortable, as you know, going out with 4- and 5-year guidance saying that we're going to grow our FRE 16% to 20% and our ROI 20% plus. And we've been beating that at least up until this point in the year.

Yes for sure. All right. Thank you very much, Mike. It's great having you...

Appreciate it. Thank you.

Good morning, everyone. Welcome to the Ares Management Corporation's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Friday, May 1, 2026.

I would now like to turn the call over to Mr. Greg Mason, Co-Head of Public Markets Investor Relations for Ares Management. Please go ahead, sir.

Good morning, and thank you for joining us today for our first quarter 2026 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, 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 first quarter earnings presentation available on the Investor Resources section of our website for reconciliations of these non-GAAP 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 a quarterly dividend of $1.35 per share on the company's Class A and nonvoting common stock, representing an increase of over 20% over our dividend in the same quarter a year ago. The dividend will be paid on June 30, 2026, to holders of record on June 16.

Now I'll turn the call over to Mike, who will start with some comments on the current market environment and our first quarter financial results.

Thank you, Greg, and good morning. We hope everybody is doing well. In the first quarter, we continued to generate strong financial results and significant growth across our key financial metrics, and we're excited and confident about the opportunities ahead for our business. Our AUM increased 18% year-over-year to $644 billion, and our fee-paying AUM increased 19% to $400 billion. This is translating into strong top line growth and profitability as management fees increased 22% year-over-year. FRE grew 26% and realized income increased 24%. We also continued to generate strong fund performance for our investors across an expanding array of investment strategies, which is helping to drive increased and more diversified investor demand across our firm. In fact, we are on track for another record year of fundraising as we raised $30 billion of gross capital in Q1, which is our highest ever first quarter and that's up 46% compared to last year's record first quarter.

Our pipeline of new institutional funds remains robust for this year and next year with three of our largest institutional private credit funds in the market over the next 12 months, two of which have already launched with significant momentum.

Our institutional franchise remains strong. Three quarters of our $644 billion of AUM is comprised of institutional capital with 14% from publicly traded closed-end funds and other sources and just over 10% from Evergreen wealth products.

With nearly 1,700 investment professionals across more than 55 global offices, we operate one of the largest and most diversified origination platforms in private markets. This platform enables us to source differentiated investments throughout market cycles and to capture market share during periods of volatility. Even with the typical seasonal slowdown in the first quarter, which was further amplified by heightened geopolitical issues, our deployment was still over $32 billion across the firm, which was higher than the first quarter of last year.

As sponsors and business owners gain increasing comfort with the market backdrop, we're seeing our forward investment pipeline increased to a new record level with notable strength across European and U.S. direct lending, alternative credit and infrastructure. The expansion of our platform is also driving new investment opportunities. For example, over the past 2 years, we've added 14 new investment products and strategies, which now total $68 billion in AUM. These new additions to the platform enable us to continue to expand our global origination capabilities and help us define supply-demand imbalances and to deploy capital in high conviction areas.

Our available capital continues to expand on the back of our strong fundraising and it now stands at over $158 billion. As one of the largest institutionally-backed private credit providers globally, we believe that we have the most credit dry powder of any public player in the market totaling more than $100 billion. This sets us up well for continued growth in FPAUM as we invest in today's increasingly attractive market.

Now let me dive into a few key drivers of our business, starting with fundraising. In short, we continue to see strong demand from institutional investors as many are seeking to take advantage of improving market conditions across private credit, real assets and secondaries. Institutional demand is broad-based, and we continue to see investors consolidating relationships with scaled platforms like Ares that can generate consistent performance across cycles.

Within our credit group, we raised over $20 billion in Q1, driven by strong demand across both drawdown funds and perpetual capital vehicles. In the first quarter, we held the final close for ASOF III, our latest opportunistic credit fund, raising over $8.3 billion of equity commitments and nearly $10 billion, including related transaction vehicles. ASOF III significantly exceeded its target and the size of the prior vintage. We believe that the timing of this raise is particularly compelling as the team is seeing a large pipeline of investment opportunities.

In January, we launched the third vintage of our alternative credit fund with a target of $6.5 billion. Our alternative credit strategy is where we invest across the multitrillion dollar addressable market and global asset-backed finance. Our prior alternative credit fund totaled $6.6 billion in capital, and the current fund is experiencing strong demand from existing and new institutional investors well in excess of the target. We expect to complete the fundraise in the second quarter at its hard cap as the fund is already meaningfully oversubscribed.

In U.S. direct lending, we're accelerating the launch of our fourth Senior Direct Lending fund due to improving market conditions, which are offering enhanced economics, lower leverage and improved deal terms in U.S. direct lending investments. And we anticipate a first close late third quarter or early fourth quarter of this year.

We also have some exciting structural enhancements to our main fund series, which we believe will benefit investors and enhance our fundraising capabilities and the strategy. In our third U.S. senior direct lending fund, SDL III, we raised approximately $15.3 billion in equity commitments across both levered and unlevered sleeves in the fund against a $10 billion cover. The fourth vintage in the series will be a fully levered fund and we plan to launch a new unlevered Evergreen U.S. senior direct lending core product. The two products will continue to invest together just like previous vintages, but will now provide investors with both a commingled and an evergreen opportunity. Like our third fund, we would expect this fourth fund series to also exceed its $10 billion cover.

In digital infrastructure, we're raising a global data center equity fund to take advantage of the multi-decade supply-demand imbalance as the hyperscalers drive demand for trillions of dollars of cloud and AI computing over the next 5 years, a significant portion of which will need to be solved by private equity and private credit.

Our digital infrastructure group, which includes our own vertically integrated operating platform, data infrastructure, has a differentiated position in the market, characterized by long-standing hyperscaler relationships, significant investment and development expertise and multiple seed projects in the pipeline and top tier markets. We expect to hold a significant first close for our global data center fund this summer.

As many of you know, we operate one of the largest real estate platforms globally, and our scale continues to drive accelerating demand across our real estate funds. In the first quarter, our 11th U.S. value-add fund closed at its increased hard cap of $3.1 billion in fund commitments and approximately $3.5 billion of total capital. Similarly, our fifth Japan logistics development fund has seen very strong demand following the excellent performance of prior vintages. We expect to hold the first close this spring and ultimately reach the hard cap later this year. And in secondaries, we're back in the market with our third real estate secondaries fund and expect to first close in the back half of the year.

Within our wealth business, we had another strong quarter driven by accelerating demand in our 6 products outside of U.S. private credit. In fact, we raised the same amount of gross and net equity capital of $4 billion and $3 billion, respectively, in the first quarter as we did in the fourth quarter of last year. On a year-over-year basis, our wealth AUM increased 54% to $68 billion. We believe that our diversified product offering is enabling us to gain market share as advisers broaden their focus away from U.S. private credit toward other alternative products like infrastructure, real estate and private equity. For example, during the first quarter, our core infrastructure fund raised $1 billion in equity subscriptions and now has over $3 billion of AUM and the fund just launched on its first major platform with its first capital raise on that platform closing today.

We're also seeing improving flows across our 2 non-traded REITs with more than $640 million of inflows in the quarter. and our European direct lending wealth products had equity flows of nearly $1.2 billion. Within U.S. direct lending, equity flows into our non-traded BDC have moderated relative to prior periods, while fund performance and underlying credit fundamentals remain strong. Since inception, the non-traded BDC has generated an annualized return of over 10% for Class I shares. Notably, the majority of repurchase requests during the most recent quarter came from a limited number of family offices and smaller institutions in select regions and over 95% of our investors did not request redemptions.

It's important to remember that these vehicles are specifically designed to align liquidity with the underlying assets. For example, the non-traded BDCs 5% quarterly repurchase framework approximates the natural repayments of a typical U.S. direct lending portfolio. This repurchase framework is intended to provide access to attractively yielding illiquid assets while also mitigating against the risk of forced asset sales from heightened redemption requests.

Finally, we believe that we're well positioned to continue to drive strong growth regardless of redemption activity in our key U.S. private credit vehicles. These 2 private credit wealth products account for approximately 4.5% of our overall fee paying AUM. While we believe it is a very unlikely scenario, if these two funds were to experience 5% quarterly redemptions for a full year with no gross inflows, we estimate that based on existing fund structures and redemption mechanics, it could impact our FPAUM by approximately 1% annually.

Considering that our FPAUM increased by over 19% in the past 12 months, and our current AUM not yet paying fees available for deployment represents another 19% of future growth in FPAUM, we would expect the impact of any redemption activity to be minimum. In reality, any deployment that would have gone to these non-traded vehicles will likely be taken up by other traded and institutional funds and SMAs with limited to no impact to our current year profitability.

On the investing side, overall deployment activity increased modestly compared to the first quarter of 2025, driven by real estate, alternative credit, European direct lending and private equity. The transaction market environment for U.S. direct lending was slower in the first quarter as industry-wide deal count and middle market M&A declined by 41% in Q1 '26 versus Q1 '25 due to impacts from the Iran War and changing inflation and rate expectations. During slower periods, we often gain considerable market share due to our certainty of capital and broad sourcing capabilities and the first quarter was no exception. Over the past several weeks, we're beginning to see a pickup in new U.S. direct lending transaction activity as market participants adjust to changing market conditions.

As Jarrod will discuss later in the call, our investment portfolios are performing well and credit fundamentals remain positive. Of course, the broader market will see defaults, which will inevitably garner retention but we are not seeing signs of an impending default cycle, and we believe that private credit players are getting well compensated for the risks with enhanced economics. We have operated our U.S. direct lending strategy for over 20 years. And looking at Ares' BDC, Ares Capital Corporation, we've deployed and exited more than $70 billion in capital with an asset level realized gross IRR of 13% on all exited investments.

In our view, the growth of the private credit asset class as part of a multi-decade structural evolution supported first by continued expansion of the private markets relative to the public markets. Secondly, it was driven by bank consolidation, the need for tight bank regulation given the dependence on federally insured deposits and the inherent asset liability mismatch and leverage in the banking system. And lastly, the syndicated bank loan and high-yield markets have been focused on larger companies for decades, which has left a growing Voya for middle-market companies, which comprise about 1/3 of our economy.

The U.S. private credit market, which is funded 75% or more by institutional investors serves as a stabilizing force in the economy when bank lending contracts or when the capital markets become constrained. For example, if you look over the last 25 years, U.S. private credit has contracted once, which was over 10 years ago versus the banking sector, which has contracted 8x over the same period.

Today, Ares has over $100 billion in available capital to invest in credit, and we estimate that the industry has over $500 billion of available capital, which is larger than the size of the entire non-traded BDC industry.

While private credit has expanded at low double-digit rates over the past decade, this growth tracks in line with the growth of the $5 trillion private equity sector and other private market asset classes. Also, the percentage of our economy's GDP funded by corporate credit, including private credit, bank C&I loans, syndicated bank loans and high-yield bonds has not changed over the past decade. This indicates that the growth of private credit is not increasing the amount of leverage credit in the economy and is providing more consistent funding throughout business cycles. Every loan funded by private credit with comparatively less fund or balance sheet leverage should reduce risk of volatility.

Software is a topic that's rightfully drawing a lot of attention, but there seems to be confusion on how to distinguish between software exposures and different software companies. Senior debt is much more protected from downside risks than equity in the capital structure and individual software companies have varying degrees of potential AI disruption risks and opportunities. In the traded loan markets, we're seeing a bifurcation in the prices of software loans between the potentially less and more impacted companies. For example, we've tracked a basket of companies focused on core operational software, systems of record and highly regulated markets where their loans have traded down 2% on average year-to-date to 98.99 versus another basket of software companies primarily focused on content generation, data analysis or productivity tools where their loans have declined 24% on average year-to-date and now trade below 65.

As we've discussed in the past, Ares' software exposure, which is 6% of overall AUM and less than 8% of our AUM in private credit is focused on senior lending, primarily to software companies and the former basket serving the core operations of complex businesses in regulated industries with proprietary data.

As you may have heard from the Ares Capital call earlier this week, we engaged 1 of the top three global management consulting firms to supplement our own internal analysis of our software-oriented portfolio. They conducted a 9-week independent and detailed review of the potential forward-looking AI risk in our software-oriented portfolio companies. And the study also included our relatively lower software exposure in our European direct lending portfolio. The study created each company on a spectrum base of risk characteristics and concluded that our software-oriented portfolio is very well positioned with 86% of the portfolio with low risk of potential AI disruption. Approximately 13% of the portfolio was classified as medium risk. These companies are performing well today but have a greater need and an opportunity to adapt AI risks in their business and only 1% of the portfolio was categorized as having high risk of AI disruption. If the consultants framework, which aligns with our own rigorous underwriting views, proves directionally correct, the portion of our software exposure that is medium to high risk represents less than 2% of our U.S. and European direct lending AUM and well under 1% of our total firm-wide AUM.

And lastly, before turning the call over to Jarrod, I wanted to highlight the successful IPO last week of X-Energy, which is a small modular nuclear reactor company. In 2022, we identified X-Energy as a revolutionary company through our first SPAC, Ares Acquisition Corp. 1. As we approach the leaseback process in the fall of '23, high inflation and rapidly rising interest rates impacted market conditions for the transaction. We chose to support X-Energy in a private transaction and the company continued to execute its strategy including receiving support from strategic investors like Amazon.

Last week, X-Energy completed its IPO that was meaningfully oversubscribed raising over $1 billion at a 20% premium to the high end of the proposed range and represented the largest equity offering ever for a nuclear company. The cost basis of our balance sheet investment is a little over $100 million. And based on the recent trading price of the stock, our current fair value net of employee compensation is close to $700 million. We're super excited to celebrate this significant milestone with our partners at X-Energy.

And with that, I'll turn the call over to Jarrod to provide additional details on our financial results. Jarrod?

Thanks, Mike. Good morning, everyone. Our financial results in the first quarter demonstrate the strength, durability, diversification of our platform with continued strong growth across our key financial metrics. Importantly, these results reinforce what we believe is one of the defining characteristics of our business model, which is our ability to continue growing often faster through periods of market dislocation, given our FRE rich earnings profile, balance sheet late strategy, the diversity of our AUM and investment strategies and the scale of our global platform. As we look ahead, we remain confident that we're on track to meet our financial objectives for the year. We continue to benefit from a large base of AUM is not yet paying fees, strong fundraising momentum, especially in institutional channel and improving conditions for our deployment across a broader set of strategies. We believe the combination of long-duration capital, flexible investment mandates, significant dry powder an asset-light balance sheet and a management fee-centric model positions us well to navigate a range of market environments while continuing to drive growth in earnings over time.

Turning to our results. Quarterly management fees exceeded $1 billion for the first time in our firm's history and increased 22% compared to the prior year period. This growth continues to be driven by expansion in FPAUM, which increased 19% year-over-year due to strong underlying fundraising and deployment activity across the platform. Fee-related performance revenues totaled $20 million in the quarter, which were driven by APMF. As a reminder, the timing of FRPR varies by fund and investment strategy. Within credit, we typically recognize FRPR from our alternative credit strategy in the third quarter, with most of the remaining credit strategies recognized in the fourth quarter. In real estate, FRPR has concentrated in the fourth quarter while APMS and certain other perpetual vehicles generate FRPR on a more recurring quarterly basis.

Fee-related earnings were $464 million in the quarter, increasing 26% year-over-year. Our FRE margin expanded 90 basis points year-over-year to 42.4%. These results reflect our ability to drive operating leverage as we scale. We continue to have good visibility in the margin expansion for the full year towards the high end of our targeted range, driven by a number of factors, including continued efficiencies from the GCP integration, the data center business slipping from the negative to a positive FRE contributor with new global digital infrastructure fund paying on committed capital and our expectations for continued strong growth in AUM and FPAUM from deployment.

Turning to performance income. We generated $75 million in realized net performance income, an 84% increase over the year ago period. Interest expense increased to $51 million due to normal increased Q1 seasonality. Additionally, interest income should remain around the Q1 level going forward. Realized income for the quarter was $503 million, representing growth of 24% year-over-year. And after-tax realized income per share was $1.24, up 14% compared to the prior year period.

Our tax rate in the quarter totaled 13.5%. The just above the midpoint of our 11% to 15% expected range for the year, in line with where we'd expect the rate to be for the remainder of the year.

As Mike stated, our fund performance remains strong across the platform. Over the last 12 months, we generated time-weighted returns of approximately 12% to 15% in U.S. direct lending strategies, 15% in alternative credit, 12% in opportunistic credit, 9% in European Direct Lending and over 20% in APAC credit. We continue to see strong fundamental performance in our funds. When we look across private and public private markets, nothing we're observing suggests we are at or near a turn in the credit cycle.

Across our direct lending portfolios, we're seeing continued near 10% EBITDA growth. Loan-to-value ratios in the mid-40% range as private equity funds continue to fund new transactions with majority in equity and improving interest coverage ratios of 2.2x. Nonaccrual ratios are well below historical norms, and we're generating financing -- and we're generally financing much larger, more resilient businesses today versus past manages.

The relatively small number of credit issues we see are company specific rather than indicative of broader trends. And we're not seeing any credit deterioration broadly within software as we have only one software company on nonaccrual.

Within Real Assets, our diversified non-traded REIT has generated a total return of approximately 12% over the last 12 months. Our infrastructure debt strategy produced gross returns of approximately 9% in the last 12 months. In secondaries, APMF has generated a since inception net return of over 14%, while our primary private equity strategies continue to deliver strong performance with net returns of approximately 15% in ACOF VI. Overall, these results reflect the breadth and consistency of our investment performance across strategies and continue to be a key differentiator for Ares as we look to drive long-term growth in AUM and earnings.

In conclusion, for the year 2026, we're on track with our longer-term goals of generating compound annual growth of 16% to 20% in FRE, 20% to 25% in realized income and 20% in dividends. We anticipate continued FRE margin expansion, and we expect to be within the upper end of our 0 to 150 basis point annual target this year. We're on track for another record year of fundraising, and our expansive origination platform, record levels of dry powder and flexible capital positions us for strong deployment even in uncertain markets.

I'll now turn the call back over to Mike for his concluding remarks.

Thanks, Jarrod. As we step back and reflect on the events of the first quarter, we believe one of the most important takeaways is the continued strength and resilience of our institutional fundraising franchise. Last week, we held our Global Annual Meeting for our institutional investors. We welcomed over 1,100 attendees from across the world to both highlight the breadth and depth of Ares' investment platform and to expand and deepen relationships with our largest investors.

We continue to see enthusiastic engagement from large, sophisticated investors who are allocating capital with a long-term perspective and are increasingly consolidating relationships with scale managers that can deliver across strategies and cycles. That demand has remained consistent despite the recent market noise. And in many cases, we're seeing investors lean in, given the improving opportunity set.

I think it's noteworthy that we continue to exceed our fundraising targets in most of our flagship fundraises. And in many cases, we're getting to the hard cap in a shorter amount of time than in prior vintages. We also believe that the current environment is setting up very well for enhanced deployment. Periods of uncertainty tend to create more attractive investment terms and risk-adjusted returns, and we're already seeing a broader set of opportunities across credit, real assets and secondaries.

Given the ongoing impacts from geopolitical issues and certain redemptions in retail-focused funds, the current environment is offering wider spreads, higher fees and better terms. With over $150 billion of available capital and a highly diversified patient platform, we're well positioned to take advantage of these conditions and deploy capital at more attractive risk-adjusted returns.

Importantly, our business model continues to provide us with a high degree of diversification, stability and flexibility. We operate leading businesses across an array of global credit, real estate, infrastructure, secondaries and PE strategies, our earnings are driven by management fees supported by long duration capital and complemented by performance income that we believe will continue to grow over time. This combination enables us to remain patient and opportunistic while continuing to generate durable growth in earnings. We're excited about the many levers that we have for profitable growth. and our ability to continue driving long-term shareholder value.

I remind everyone that Ares experienced its two fastest periods of growth during the GFC and COVID, as we're able to leverage our competitive advantages to consolidate share and as our institutional investors increase their allocations to us to take advantage of improving returns in choppy markets.

As always, I want to thank our employees around the world for their continued hard work and dedication, and I want to thank our investors for their ongoing support and confidence in our platform.

And with that, operator, could you please open the line for questions?

[Operator Instructions] We'll go first today to Craig Siegenthaler with Bank of America.

So unit strong fundraising quarter in the credit platform. And that's despite a deceleration in two of your newer retail funds that, as you said, only represent 5% of AUM. So I'm curious if you can provide some perspective on the evolving demand dynamics between the institutional channel, the insurance channel and also the retail channel within private credit.

Sure. Thanks for the question, Craig. I'm going to step back and just contextualize the answer with some things that I've talked to you about and others on the line, which is -- when you think about how the private credit market has been evolving and how Ares has chosen to participate in it, folks remember, we actually started in private credit with Ares Capital Corporation, a traded BDC. And as we referenced on the call, obviously, that entity has a substantial public track record through cycles. And if you look at the 21-year plus track record there, the return coming out of ARCC has beaten the S&P 500, the syndicated bank loan market, the high-yield bond market and probably most anything else that people have invested in.

It's a wonderful, wonderful company and a wonderful structure. But what we learned was that because of the ebbs and flows, particularly within the retail market, it was challenging to take full advantage of cycles when they developed only in that traded BDC fund structure. And so we launched in earnest our institutional fund platform with the SDL and A Series, which have obviously scaled with similarly strong performance and watching those 2 work together, what you learn is, a, diversification of funding is critically important to navigate cycles and drive that performance. But also the ability to have those funds working hand in hand is performance-enhancing for both funds, given our ability to continue to invest into the franchise, drive new originations, have the dry powder to support our best performing companies, et cetera, et cetera. So you kind of need both.

And then we got into this world where wealth was developing, and we were actually last in our space to come into the market in earnest just given some of the learnings that we had, and we've talked about this before, kind of the procyclicality of flows sometimes within that channel, both good and bad. And so we've been very measured as we've thought about how to build the fund complex to capture the full complement of opportunities across the cycle within traded, non-traded and institutional. But what we've always tried to articulate is the assets are the same, and I said this in the prepared remarks. So if we originate a senior secured loan, and we have availability of capital in each of those three pools, each of those three pools will get to participate. So not surprisingly, if you are beginning to see slowing inflows or increased redemptions in the non-traded part of our business, that does not detract from our global deployment opportunity. And those assets will find their ways into other funds and therefore, will not have an impact on our profitability.

Insurance is something slightly different. I think it's important that we talk about it separately because 90% plus of insurance company's balance sheet is investment grade rated and high grade. And I do think it is exciting to talk about the growth of the private high-grade market, but it is a different asset class in many respects from the traditional private credit and sub-investment-grade credit market.

And so when you think about the demand, I think you have to think about in terms of not just the channels, Craig, but also high grade versus sub-investment grade. What I can tell you is if you look at our $20 billion of capital, I think it is absolutely indicative of what's happening in the market. We raised $20 billion of capital in our credit strategies in the quarter, $5 billion of which was in wealth. And if you break down that $5 billion in wealth further $3 billion was in our 2 U.S. direct lending funds, and about $2 billion was actually in our European direct lending fund and our sports media and entertainment fund, which we would characterize as a quasi private credit product. Those two, Europe and SME, are actually enjoying very strong gross and net inflows as well despite the noise in U.S. private credit. And as I referenced on the call, we're seeing our third vintage of opportunistic credit fund ASOF hit its hard cap. We're seeing our third vintage of our ABS fund hit its hard cap and be meaningfully oversubscribed. We talked about the early momentum that we see in the next vintage of our senior direct lending fund. So everything we're seeing on the ground is that the institutional investor is not anxious. They're not allocating away from private credit. In fact, I think they're looking at this as a huge opportunity to take advantage of a bizarre dislocation and bring liquidity into the market to capture excess return.

So I apologize for the long answer there, craig, but I do think it's important that we all get the habit of not just talking about private credit is one thing or one channel. And we've been -- get a little bit more granular in terms of what we're seeing and what it's telling us. So thanks for the question.

We'll go next now to Alex Blostein with Goldman Sachs.

I was hoping we can dig a little bit more into your comments around deployment pipelines increasingly, I think you made a point that they're currently at a record in the credit card business. So I was hoping you could expand maybe which parts of the credit business, you see the biggest incremental pickup in your deployment opportunities? How the market has really evolved in the last several months, especially considering that the non-traded BDCs in the evergreen vehicles, for the most part, been kind of the incremental buyer in the last few years and how that might change the market structure and the spreads you currently see available in the states?

Thanks for the I would just comment, Alex, I don't know that they are the incremental buyer. I think if you -- you look at the market structure whether you include certain portions of high-grade private credit or exclude what you'll see is that the non-traded BDCs in aggregate, just not new flows, but AUM is somewhere between 15% and 20% of the overall private credit market. And obviously, because they don't operate with a significant amount of dry powder. I actually think when you were to look at the net flows into non-traded BDCs relative to aggregate dry powder in the institutional market. I don't actually think that they were the incremental buyer which goes back to our point earlier, just about the deployment opportunity that this creates. .

In terms of the pipeline, it was interesting because the diversification of the platform really shined through in the quarter. We saw really strong deployment in our infra and real estate businesses. Our European direct lending business, very strong deployment. Secondaries and structured Solutions, very strong. ABF, we saw a little bit of a slowdown in the U.S. direct lending part of the business. I think that's more reflective of what's happening in middle market M&A in the private equity market as they digest the warning on and what the indication is for inflation and the rate backdrop. But as Kort said on the ARCC call, at least over the last number of weeks, we've seen people pick their pencils back up and the pipeline is reengaged. And so as we saw last year, I think there's a strong possibility that the deployment will pick up in that part of the market pretty aggressively as we head into the back half of the year.

It's been pretty broad-based, which is part of the value of having the global diversification that we have. If there is one theme that I would point out that's accelerating, it's this idea of liquidity generated opportunity, meaning there's a lot of companies in the public and private markets. But either because of the rate environment or flows are going to need to seek creative liquidity solutions through opportunistic credit, secondaries and even direct lending and recap solutions that I think are going to drive some pretty significant deployment. So we're pretty excited about the setup here, Alex. And I'd say that pretty much every investment team is incredibly active right now.

Next now to Steven Chubak with Wolfe Research.

So one thing to double-click into some of the comments on retail, while non-traded BDC flows have come under pressure, flows and other products, which you alluded to, Mike, such as infrastructure secondaries have been much more resilient. Some of the flows are even begin to accelerate. I was hoping you could speak to what you're hearing from advisers and gatekeepers as it relates to retail appetite for strategies outside of credit. And given the fundraising pressures on the private credit side, whether you see a credible path to hitting the recently revised 2018 -- 2028, sorry, fundraising target of $125 billion?

Yes. Thanks for the question. Again, zooming out, I think it's important that people appreciate that the development in the wealth channel is about investor access and it's about bringing differentiated solutions to a part of the market that Hartford didn't have the opportunity to invest in. And I think for the large wealth platforms and the large RIA and advisory platforms, they would tell you that their clients are meaningfully underinvested to the types of solutions that we and others like us are offering around differentiated equity exposure, differentiated yield exposure, tax advantage access to real assets. And so there's a major secular trend at play here that will overwhelm in my opinion, whatever periodic noise we see whether it was the periodic noise we had in the real estate part of the market a couple of years ago or the periodic noise that we're seeing now in U.S. direct lending.

And so as I mentioned on our prepared remarks and you see in the numbers, we have 8 products in the channel. You could maybe add 2 because we have 2 exchange, 1031 exchanges in our replatform that continue to see demand pull through. And while the U.S. private credit funds are seeing slowing demand, we're seeing increasing demand elsewhere because of the secular momentum I talked about.

I'd also remind people because we did put this out when we talked about our redemptions. If you were to look at our non-traded BDC, which is generating top market performance. If you were to really see where those redemptions were coming from, it was smaller family offices and some smaller institutions in non-U.S. regions. It was not what I would call the well-advised high net worth investor that tends to be the consumer of this product. If you look at it from a different angle, 95% of our investor base in the BDC did not want to redeem and that was in addition to the inflows that we saw that were meaningful in the period. So I'm not even sure that people have the redemption narrative, right? Because it's not a broad-based reputation of of alts in the wealth channel. It seems to be something different. The adviser community.

We spend a lot of time on education and support with the individual advisers and their investors. And I think that's why you're just -- you're not seeing broad-based request for redemptions. It tends to be a little bit more isolated. And I think once people understand that, hopefully, we'll kind of get on with it.

And the confidence around the $125 billion?

Yes, we have not changed our guidance.

We move next now to Patrick Davitt with Autonomous Research.

Did you hear the more constructive direct lending pipeline commentary, but obviously, you can't really see that in the hard numbers that have been put out there yet. So could you maybe put a bit more meat around how that, I guess, shadow pipeline, it sounds like you're talking about compares to historical periods and/or when you think we can expect to start converting into real announcements?

Yes. I think Kort did a good job talking about this on the call. There's a lag, obviously. So the deals that we're closing now have been in process with visibility here for months. And so as you would expect, we have a top-down view of all of the transaction flow that's working its way through the business, including the direct lending business. And I would say that the aggregate pipeline across the firm is at a record level and that the direct lending pipeline is increasing in momentum. We would hope that, that pulls through. A lot of times when you see things like the conflict in Iran, you get a little bit of a pause as everybody just evaluates. And then once people understand what it is that we're -- we're working with the pipeline will pick up.

A lot of the longer-term catalysts are still in place. You just have a significant amount of private equity invested that is aging that needs some form of resolution through a transaction -- sale transaction refinancing that or other means of dealing with its capital structure, that's still in play. You still do have an administration that is very pro business and a regulatory backdrop that is pro M&A. And I think that will play through. And I think with rates stabilize, even if they're not necessarily coming down the way the market anticipated a few months ago, I think with a stable rate backdrop, that should also continue to be constructive for transaction activity. Not to say that it's perfectly -- perfect analog. But if you look at last year with the tariffs in April, you saw a similar pause in the market where you had meaningful pipeline build through January, February, tariffs hit, there was a pause, and then there was a reacceleration of the pipeline through the back half of the year and actually turned out to be a record deployment year. So I can't guarantee that that's the case, but you do see these periodic pauses. But I think a lot of the catalysts are still intact and just the weight of money that needs to get resolved is going to drive people to the deal table.

We'll go next now to Bill Katz with TD Cowen.

Great. So maybe one for Jarrod. Maybe I missed it. I apologize if you did a lot of things going on this morning. Just on the realization side of the equation. I know that Q1 came out a little bit lighter than maybe many of us are anticipating. It sounds like there's a ton of momentum, not only for you guys but the industry at large. Can you give us just a general sense of how you're thinking about the year is playing through a little bit? And then just maybe a second question. Given the momentum on the FRE margins for this year, how do we think about the -- I know it's early here, but how should we think about 2027, just given what seems to be significant scaling across the entire platform?

Yes. Thanks, Bill. Great to hear from you. On realizations, it's not too different in terms of the power of what Mike just said, the more active you have in transactional backdrop, the more you the ability to pull realizations forward. The less active, you may have some extended durations. The nice thing about our European waterfalls that we've talked about in the past, is they're predominantly from our credit funds. So that means if the duration is extended, you're actually continuing to earn interest back on those, which actually increases your accrued balance to be recaptured later as part of the European waterfall. We had just put out an 8-K when we were explaining what we thought would happen for this quarter and put the same guidance that we have provided prior for the year in there. And looking into next year, we've talked a little bit about that, and there's really no change there. .

I think when you think about it, I told you this before, Bill, the hardest thing for us is to pick the exact quarter because you don't really control whether a deal is refinanced or whether transaction activity results in a lot of deal turnover. But the good thing is because of the nature of these assets, you're not dependent on a market price coming to fruition through a transaction. So that's one of our favor parts about the waterfall. And we're really excited to have our first harvest from our first U.S. company as a direct lending fund here in the first quarter.

In terms of margin, look, we go at that 0 to 150 basis points guidance on purpose as we get closer to the year. As you know, our business is built so that as we deploy it creates natural scale. But what we don't want to do is take away from investment opportunities. So as we see the opportunity to do something like investment in data center business, which we know will be FRE negative for a period of time until we were able to launch a fund that will be very, very accretive to the firm overall and margin accretive. That's the type of thing that we want to see our flexibility to do. So I'd say that we expect to still be well within that 0 to 150 guidance, and we'll look at what the opportunities present themselves through the current volatility we're in and into the back half of the year.

We go next now to Bart Dziarski at RBC Capital Markets.

Great. Just wanted to ask around the secondaries market opportunity. It sounds like we're seeing an acceleration this year compared to last and you've got secondaries across 4 asset classes, so pretty built out. And just could you give us an update on what you're seeing on the ground with regards to the secondary opportunity accelerating.

Sure. I'm going to give context as I always do, so I apologize before I get there. Just I remind people that we came into the secondaries business, at least in earnest, through the acquisition of Landmark, gosh, almost 6 years ago. And the working thesis behind that acquisition was that we saw a transformation happening in the secondary space along 3 critical axes. One was a shift from LP led to GP led, meaning not just the sale of portfolios by LPs. But the desire for GPs to use the secondary market for creative liquidity solutions, everything from NAV loans to GP press to minority stake sales. And that was kind of an evolution that was taking place that we felt was going to transform the industry. We also were beginning to see that the installed base or the primary market for other parts of the alternative landscape, real estate infrastructure and credit. We're growing to a level that would also require more robust secondary solutions. And third, we were beginning to see a growth in wealth and retail that we're going to want to access more diversified broad-based private equity exposures, and we would be able to deliver from our core buyout business. So we made that acquisition. Post that acquisition, we obviously launched into the wealth channel, scaled the product set to attack the GP led market, and then launched, I think, pioneered the credit secondaries business and have now grown that into a meaningful growth engine for the firm.

The reason I give you that context is because that's exactly what is happening in the secondary space. The primary markets have grown and evolved. LPs And GPs alike are looking for creative liquidity. The GP led part of the market represents half, if not more, of the current deployment opportunity. And that market, I think, is here to stay. And the combination of all those trends that we invested behind is why you're just seeing such a significant amount of of opportunity there.

What's most interesting to me though is if you were to look at the annual deployment that happens in secondaries against the industry dry powder, it's about a one-to-one relationship, which probably makes it the least well-capitalized segment of the alternative asset space, which we like because you tend to generate excess return in markets where there's a supply-demand imbalance of capital. So not only is the market opportunity growing, but the fundraising has not kept pace with the growth in demand. And that's one of the reasons why we're scaling as nicely as we are.

We'll go next now to Ken Worthington with JPMorgan.

Can you talk about the deployment opportunity for direct lending in Europe? I know the M&A backdrop is a little bit different there than we see in the U.S., but you've got a record-sized fund. I'm just curious to better understand what you're seeing there.

Yes. Europe similar to -- it has a lot of the same dynamics that the U.S. market does. We have fully developed businesses in credit across Europe, opportunistic direct lending, real estate, infrastructure and kind of all things in between. And the deployment there has been quite robust. We actually -- I was pleasantly surprised with the deployment in Q1 in the European market. I think that going into this year, some may have had the view that the transaction activity would be slower. But I think that some of the geopolitical reorganization that's happening around the world has brought more focus and attention to investing in the Eurozone. And I think the market opportunity is probably better than we would have expected. So I would -- if the first quarter is an indication, the European direct lending business is in a good spot. The benefit of the diversification that I keep harping on. Last year, Europe had a slower year than the U.S. as the U.S. accelerated into that back half opportunity that I talked about. U.S. direct lending was a little slower this quarter. And European direct lending, I think, surprised to the upside. So you do have balance when you zoom out and look at the credit business from the top down, but I think we've been pretty happy with the pace of deployment there. And again, we get a look at the pipelines and the pipelines in Europe are as healthy as they are here.

We'll go next now to Mike Brown with UBS.

Mike, I just wanted to maybe ask a question on the software side. So you emphasized the low LTV, the near-zero non-accruals. You talked a lot about on the ARCC call. But I guess, much of this is a little bit backwards looking. So maybe give us a little bit of color into the forward look or maybe how you think about kind of stress testing the portfolio. What do you kind of see in those underlying fundamentals that will give you confidence that these companies will continue to operate successfully? And then -- how are you approaching software now are you kind of leaning in, in back within direct lending? And is there any interesting opportunities emerging on like the credit op side or even on the secondary side?

Yes, it's a good question. The most important thing for people to appreciate at least in terms of our exposure, and then I'll try to come at this from one slightly different angle. The software portfolio is incredibly well diversified in terms of the number of names. It is sponsor backed, and it sits at roughly a 40% loan to value. And if you were to look at ARCC's current quarter as a proxy, you will have seen that we mark down the equity value within the software portfolio commensurate with what we're seeing in the broader markets. So the LTV in the portfolio actually went up slightly. But when you're sitting at the top of the capital structure at 40% with 60% equity value below you, you have to eat through all of that equity before you're taking losses in your credit book. And that is going to be the most significant mitigant to loss as we see all of this play out.

The weighted average remaining maturity, if you will, in our software portfolio, which is probably what the general market is, is about 3 years. And so what that means is there is going to be a moment here over the next couple of years where owners of these businesses and lenders to those businesses are going to have to evaluate where that company sits, how disrupted it's been, whether it is going to benefit into the future and how it's going to get resolved, and that's either going to be transfer of ownership, a debt paydown, a debt repricing. So this is going to play out slowly over time. What's interesting about what we're seeing in our book now is the contractual revenues at these businesses are actually growing, and we're seeing EBITDA growth in the 10% range, and that's a reflection of new customer adds. And as you're adding new customers, the contract length is probably outside the maturity date. And so in a lot of these businesses, the financial picture will not erode even if there's a view that the business model needs to adapt or has or hasn't adapted. And so this is not a tomorrow thing. We are very confident in the quality of the software book. And we have been since underwriting, we think that we are getting very well paid for the risk that we're taking there. And as a result, when new software deals come in and Kort talked about this, there are deals that are getting done because people understand that there are competitive moats around those businesses, and you can get paid incremental return because of the anxiety around software. But we're also using this market opportunity to actually exit some names where maybe we have less conviction. And one of the reasons we saw the gross to net number that we did in the direct lending portfolio this quarter is we actually took the opportunity to get out of a couple of names where maybe we didn't have as much confidence.

The way I oversimplified my own brand, as I think about it as the CEO of Ares, what are we doing here. And we have over 500 core systems that run our company. Everything from our core financial systems and general ledger to our cybersecurity platforms to our order management and trade management systems, we are not ripping those systems out. We are putting an AI layer in at the company and investing in that to make sure that we get the most efficient output from those systems and the data that sits within it. But we're not moving away from those systems. In fact, those system providers are using AI to deliver a better product to us. And so if you just try to personalize it a little bit and think about the use of AI in your own life, you're probably not ripping Excel out of your computer, but you're using AI to supplement a core system in your daily work stream. And so I think a lot of the opportunities that exist in AI are not going to be displacing core systems are going to be there to enhance them. And those are the types of things that we've obviously focused on investing on.

We'll go next now to Ben Budish with Barclays.

I guess now -- maybe another one for Jarrod. Typically, I think you give us a few more guidance tidbits. Just curious if there's anything you can share around your expectations for the European style realization revenues for the year, G&A growth usually or sometimes you give us a little help with expectations for FRPR? I know that's Q4 I think we may be a little bit ways off, but -- just anything else you can share to help kind of fine tune. It sounds like on the margin expansion, maybe a little bit predicated on the cadence of deployment just quarter-to-quarter, but anything else you could share there, that would be helpful.

Yes. Thanks, Ben. I feel like I covered most of the main ones that we normally get about through Investor Day and things of that nature. On G&A, that's obviously encompassed within the margin guidance. The one thing I'd highlight, Mike mentioned it earlier in the prepared remarks, we had an amazing AGM with over 1,100 attendees there. Normally, we have AGMs throughout the year. So in terms of our G&A, you'll probably see a little bit more of an increase in G&A next quarter. But that means that we won't have that travel and AGM expense for the -- all of the different strategies in the third and fourth quarters. So there will be a little bit of imbalance just in terms of the trending there.

You can look back to 2024 is a similar time that we have that talked a little bit about it here. It's going to be somewhere in the high single-digit, low double-digit type of increase in G&A for the travel and all the expense related to that. Otherwise, everything is pretty well in line, as we've talked about with all the guidance that we've given prior. So -- we're -- again, as Mike said in prepared remarks, as I said, we feel really well positioned in the current market environment with the breadth of the platform. There's a lot of things that are extremely active right now, they're can drive us towards those goals.

We'll go next now to Brennan Hawken with BMO Capital Markets.

Mike, you just spoke a bit to credit selection impacting recent gross net trends. If we think about based upon your expectations today, and we plant to stake forward. Where do you see those trends shifting? And what primary factors are going to drive that?

Yes. I don't think we're changing anything in the playbook, Brennan. I mean, if you look at the history of our direct lending business, and we've been doing this for over 30 years, over 20 years here, the model is the same is that you go out and originate the broadest possible funnel of opportunities and apply rigorous diligence and portfolio management to drive return. But what may be underappreciated are two things that I think are hallmarks of our outperformance. One is our selectivity rate. So if you look at our private credit portfolios, and this is true across all of the things we do in private credit, we typically have a yes rate of about 5%, meaning we only do 5% of the deals that we see. And that's just a function of having some pretty high conviction on the types of things that we like to invest in and the types of things that we don't. And then within the core direct lending portfolio, roughly half of our deployment tends to come from incumbent relationships within the portfolio, which makes for a much easier high conviction underwriting because these are companies that we've been living with for years and years. We have a deep relationship with the management team. Understand the risks and opportunities within the business. We've seen it perform. So if you think of those two things working hand-in-hand, low selectivity rate and then the compounding effect of those incumbent relationships, I think it's one of the reasons why we've had the performance that we've had. And if you were to look at the loss rates across the board in private credit, they've all been trending close to zero. And so that's not by accident.

I don't necessarily -- I wouldn't say that we're doing anything different now. You're probably being a little bit more selective, just given a lot of the anxieties in the market, you're probably making sure that you're keeping your liquidity a little bit drier because we're heading into a spread widening environment where we're going to get better economics in my opinion, next month and this month. And so that's probably driving some of it. But I think the core tenets of how we underwrite credit and how we think about driving outperformance have not changed regardless of what we're seeing in the broader market.

We'll go next now to Brian McKenna with Citizens.

Okay. Great. So in the past, you've talked about the benefits of managing flexible pools of capital across both the public and private markets. I'm curious -- given the first quarter volatility, did you take advantage of any of this dislocation across your funds? And then can you just remind us why having this type of AUM base is so important in delivering outperformance for your clients through cycles?

Yes, sure, Brian. That is another hallmark of how we set the business up. Obviously, I talked about the diversification and the value of having these different access points. But within individual fund strategies, we also have flexible mandates. So our opportunistic credit business where we just had that meaningful $10 billion capital raise, that is a pool of capital that can invest private and public. And one of the reasons I said in my prepared remarks that the closing is coming at a very opportune moment is there are dislocations beginning to form in both the public and private market, having the ability to look at the relative value being offered in both of those and drive to the better risk-adjusted return is a good thing in terms of performance. But it's not just the public private, it could be senior versus junior or could be debt versus equity. And you're constantly looking at relative value across the markets, across geographies and at different points of the capital structure.

If you are a single asset, single point in the capital structure, everything you look at is going to try to get squeezed into that framework, which by definition means that in certain parts of the cycle, you're going to misprice risk. And I think that because we've developed with a real high conviction around flexibility in asset class position and market. It's created an investment culture here around relative value and risk-adjusted return that I think is pretty unique.

And you asked specifically -- yes, you are specific. I think, yes, there are in parts of the public and traded credit markets. There are increasing opportunities to start to pivot. And I wouldn't be surprised if we actually do see that pick up as we get into the next couple of months here.

We'll go next now to Wilma Burdis with Raymond James.

Could you go to a little bit more detail in your data center business? Do you have data center AUM outside the digital infrastructure business? And what do you think the total market size could be for data centers in the intermediate term?

I'm going to let Blair that one because that's one of the places where he's spending a significant amount of time, obviously, given the opportunity set there. And I can come back and add some color.

So maybe to give a little bit of background, we've been investing in the digital space broadly for the past 10 or 15 years, broadly defined, and that's everything from towers to networks to data centers themselves. We've been doing it across several different areas within the firm that includes real estate, infrastructure, special situations asset-backed as well as our direct lending business and secondaries both real estate and infrastructure. So this has been a long-standing investment focus for us. We have over $10 billion historically in the space. One of the exciting developments at the GCP acquisition last year was adding that data digital development capability that Mike mentioned, which came already with a very, very attractive seed portfolio for which we raised about $2.5 billion last summer for some of the initial assets in the Japanese market and currently going out with a broader fund raise to address not only the seed assets that we have in-house with a significant pipeline behind it. So the answer to your question is, yes, we have it elsewhere, but adding this new development capability is just very powerful for us in the future.

In terms of the market size, it is absolutely massive. It is a multitrillion dollar market opportunity. Some of that will be in the domain of the hyperscalers themselves. However, we've sized the third-party market opportunity at around $900 billion for which when you look at the supply/demand imbalance in terms of capital being raised to address it, it's meaningful. So we are really excited about that market opportunity ahead. Certainly, the interest in what we're doing in the market, very exciting.

I would also -- I'd add one other overlay here, and I think people are beginning to make this part of the conversation. When you're talking about data centers, it's not just data centers, it's GPUs, it's power and energy. And we are one of the leaders also in the renewable energy and energy transition space. And you saw what we were able to do with our X-Energy IPO. But the digital infrastructure opportunity here is pulling together all of these different teams at scale to address the market opportunity. We obviously have a large infrastructure debt business as well where we are one of the larger lenders to other platforms and portfolios in the institutional market.

We'll go next to now to Dan Fannon with Jefferies.

I just wanted to follow up on your comments around the strength in institutional market and demand, that's continuing. I was wondering if there's any differentiation amongst that subset, whether that be Middle East or sovereign wealth given some of the dynamics happening globally or if it's truly broad-based in terms of where that's still strong?

It's pretty broad-based. We're not seeing major shifts by geography or by channel. I do think consistent with what I said earlier, there's a consolidation theme that is emerging in terms of the larger institutions are doing more with fewer GP partners. And so I think the larger platforms are the net beneficiaries of that. And so when you look at gross dollars that you're getting raised in the market, I think you're going to see a disproportionate share of those assets going to the larger incumbent platforms and many of the asset classes that we play in. That's probably the predominant takeaway. I'm not seeing major shifts and flow. I think it's also important as we talk about diversification, obviously, that you have businesses in all of these regions, Europe, U.S., Middle East, Asia because what we do see is from time to time, those investors want to increase allocation in their home region and being able to kind of meet them there, not just on the fundraising side, but also on the investment side, I think, is becoming increasingly differentiated.

Thank you. And ladies and gentlemen, that is all the time we have for questions today. So this will bring us to the conclusion of the call. If you missed any part of today's call, an archived replay of the conference will be available through June 1, 2026, to domestic callers by dialing 1(800) 829-2393 and to international callers by dialing 1 (402) 220-7206 An archived replay will also be available on the webcast link located on the homepage of the Investor Resources section of our website.

Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.

Good afternoon, everyone. The -- thank you, Mike. Thank you, everyone for joining us. Hopefully, everyone is wide awake after that light lunch.

I think it must be good. We're all eating steak for lunch.

I'm not sure how much we need an introduction for you, particularly in this room. So I'm going to keep this brief. Under Mike's leadership, Ares has become one of the defining platforms in the private market, spanning credit, private, private credit, real assets, infrastructure, secondaries, insurance capital, sports and increasingly, the individual investor channel.

While the growth and scale of Ares is impressive, I think it's the intentionality and the architecture of what you've built that really makes Ares unique. It's not just a bigger version of the traditional asset manager model, it's essentially a different operating system. And for this discussion, that's what I want to focus on, more about the shape of Ares rather than the scale, and what enables it to operate differently from many of your peers.

And on a personal note, Mike's been a close friend of mine for 40 years. We were high school classmates, Clarkstown High School North in New City, New York.

Go Rams.

Go Rams. So it's particularly nice to be up here, share the stage with you.

We were actually analysts together too at Kidder.

We were. We started our careers together at Kidder, Peabody. Actually, Mike graduated a year early, and helped me get my first job, I never forget.

Value of relationships.

True. So why don't we jump into it. I want to talk a little bit about the growth strategy. Acquisitions have played a role in the Ares growth story. You've acquired platforms like Landmark and secondaries, SSG in Asia, Black Creek, the most recently GCP in the real estate front. Instead of folding them into the Ares machine, you've allowed them to retain a higher degree of autonomy. Why? Was that a deliberate principle to the model? Or is it something that evolved as the scale started to sort of take hold?

It's very deliberate. It's consistent with the way that we run the business day to day, but maybe I'll just zoom out to contextualize how we think about growth and acquisitions. If you look at the history of the firm, about 25% of our historical growth has come through acquisition. So it has been a meaningful part, but it's never overwhelmed the organic trajectory. And for you and many of our partners here who have kind of watched the journey, we've always talked from the inception of the firm that the way that you drive value in private markets is to have origination edge, first and foremost, because at the end of the day, your clients, be they institutional investors or individuals, come to you to get differentiated exposure to drive outperformance.

And so everything we've done, whether it was organic or inorganic was viewed first through the lens of, can we do something differentiated on the sourcing and investment management front? And then two, try to go where the puck is going, sketch where the puck is going, meaning what markets are opening up, where we have a right to win, but maybe you don't have the right talent or the right capability or the right capacity, and that's been the playbook, whether it's organic or inorganic.

So as an example, we started off in the private credit business covering largely financial sponsors in the early 2000s. As that developed, we bled it out into adjacent markets, nonsponsored industry verticals. And then we saw an opportunity to take that organically to Europe, and built the largest private credit business in Europe and still the leader to this day.

And so we've always wanted to build off of strength in places that we understand. But when we've made acquisitions, the reason why you're perceiving them as autonomous is, because we've largely made acquisitions in businesses that we're not in. But we actually understand or feel like we have a right to win or that we have something that we can actually add from a revenue synergy perspective.

That makes it a lot easier. I'd look just at the people in this room. Financial services M&A is really, really difficult if you're trying to mush two businesses together, two operating systems together, different cultures, it's a really hard thing to do. And so we have had much more conviction buying businesses that slot in adjacent to something that we do.

So you mentioned Landmark. As an example, Landmark was a pioneer in the secondary space, probably the first institutional secondaries manager that started about 40 years ago, and had a good run, but they weren't really scaling into what we perceived was going to be a transformational shift in secondaries. And the transformational shift that we were identifying and we're actually able to see it because of the depth of the network that we had on the investor and client side was, one, there's going to be a meaningful shift from GP-led -- LP-led to GP-led secondaries and that this was going to become a solutions business, not just buying LP stakes from pension funds.

Two, the primary market for secondaries is the installed base of alts. And so if you're buying off on a secular growth trend in private markets, secondary market growth will follow primary market growth, which meant that it was going to move away from largely being private equity, dominated to being real assets, real estate infra and private credit. And then, there's this whole world forming around individual access to alternatives, and one of the best ways to deliver private equity exposure into that market is through highly diversified pools of secondary exposures because that's the only place you're going to be able to get the scale to kind of derisk the product for the investor.

So we went ahead, and we bought that largely all stock at a meaningful discount to our trading value because, obviously, you need to be financially accretive, but in the course of 4 years, 4.5 years since we've owned it, we launched and scaled a nontraded product for the individual investor. We launched the market-leading credit secondaries platform and have raised significant dollars behind that. We've gone through a fundraising cycle in real estate and infra. We've gotten into the GP stakes business, so on and so forth.

So we took that chassis, if you will, and we aresified it. I don't know if that's a word, but we brought relationships to it, we brought capital to it, we brought a new product set. And if you look at what we've done, we've effectively doubled the size of that business in 4 years of ownership and completely inflected the growth trajectory of that business. So it does stand alone because we were not in the secondaries business. So the people who are running that have real autonomy to grow it, but we've been guiding them along kind of a strategic repositioning of the business.

And so I mean that's a great story because, I guess, I was going to ask it like does the autonomy ever start to conflict with the benefits of the scale, but actually, in that case, is a great example where you've used that autonomy to actually drive more scale.

So the hardest part about driving the growth of these businesses at scale is exactly what you talked about is territorialism within the businesses, competition for investor capital, demands on your sales force. So the way that we've architected the business is any part of this enterprise where we could drive economies of scale for the benefit of all, we centralize, and we scale, and we tech enable it, and we try to make it a center of excellence. So that's institutional sales, wealth sales, compliance, technology transformation, so on and so forth.

So the center of the house, we've got kind of end-to-end centers of excellence that everybody benefits from, but the minute it bleeds into the specific specialization of that business, they have complete autonomy to drive the business forward, and that's created a really healthy feedback loop where we can kind of push initiatives and ideas from the top of the house, and they can bubble up ideas from the field, right? I was talking to a GP, and they told me that if we had this product, we could scale it. And so part of what we've done is we've created the culture of collaboration where those ideas are percolating, and then, we can support the scale of it?

The -- one thing that's always stood out knowing the firm as well as I have over the years is when you look across your leadership team, you've got folks that you've worked together with for 30 years. You've known them for 40 years in the case of like a guy, Dan Katz, and Kipp deVeer and Mitch and Smitty, and whatnot, is -- how important is trust capital to you as you sort of look across the organization and the leadership and the way you've organized the business?

Everything. It's funny. When we try to define our competitive advantages, we talk a lot about scale, and we talk about flexibility, but the core value driver for our company, as we talk about is just the power of our relationship, network. And the way that we invest in our clients and that they invest in us, which may sound warm and fuzzy, but you're talking about our lifelong friendship. And how we've kind of had our careers winding and intertwining, those are really hard to replicate. And many of you here in the client business, you -- when you build that kind of trust over decades, not years, very hard to displace. And you start to get really long-term greedy and less transactional, and that's self-reinforcing in terms of how people want to interact with us.

The investment business is really, really hard, particularly in Alts. You kind of you set a business plan, you make an investment and you have to wait 5-, 6-, 7-plus years to know if you were right or not. And so when you talk about trust capital, the more trust that you build around those investment committee tables where everyone kind of has a view of shared success, people aren't pointing fingers on bad investments, people aren't taking disproportionate credit for good ones. It just creates a stability that is really value enhancing over time. And what it's allowed for us is, we've now raised and mentored 2 or 3 generations of leaders in the firm in that trust-based culture because we were role modeling what it looked like to partner with your friends around the building of these businesses.

And so now we have people who are running very, very large businesses at Ares that started off kind of around that table and seeing what that looked like. It's important now, too, because you asked it in the last question that the excess value capture that's happening now is how do you get into the gaps between these product lines that used to be pretty rigid, private equity, infrastructure, credit. There are things like digital infrastructure that touches our real estate business, our asset-based finance business, our insurance business, our private credit business, our infra equity business.

And if you have broad trust and collaboration, the way that you can resource growth around those intersections is fundamentally different than people who are going to be fighting over who gets credit for the growth or who gets the opportunity to actually build that business.

The -- as I think more about sort of the building out the platform, you've built this broad toolkit across the capital stack, right? Direct lending, secondaries, NAV lending, pref equity, was that part of the design? Was it to be a sort of a solutions provider? Or is it sort of just over time as you're making acquisitions as you're getting into new businesses, over time, it became less of being a product provider, and then, you started to sort of link them together to be the solutions provider?

In all honesty, it's more the former than the latter. I think when we went into the business building phase, it was always with a customer-centric approach, which I talk a lot about is differentiated because if you look at a lot of the large Alt managers. They came at this opportunity largely from the private equity side, in terms of the roots in the DNA or the traded market side where they were the client. So in the early days, they would be waiting for the phone to ring and someone was calling them with an opportunity.

Our DNA was middle market direct lending, get on an airplane, fly to a small city and go originate and service the client. And so the orientation of the firm has always been around meeting the needs of the client and the customer, similar to banking, which is where we grew up. And so by orienting our investment people to think that way, as the toolkit expanded, it was very easy for them to meet the client where they were. And it was also back to the feedback loop comment, easy for them to understand that maybe we could do more with that client, or maybe the traditional banks or insurance company lenders weren't meeting their needs.

So if you look at the business today, it's not private credit, NAV loans, it's GP solutions. And if we're talking to a large private equity manager, we're talking to them about financing new deals, refinancing existing deals, helping them with a NAV loan or GP pref because they're having a liquidity issue, maybe it's a stake in their business, maybe -- so maybe it's an acquisition, we're approaching them holistically as a client, much the way that a lot of the larger financial services institutions do now, which is just fundamentally different than the business used to be. It used to be much more targeted and niche.

Let's talk about the -- everyone is looking for an information edge, right? You're investing across multiple geographies across the globe. You're investing in lots of different sectors, different strategies across the business, thousands of borrowers that you're lending to, what are you seeing from all that information that perhaps that the public markets isn't making clear?

I think there's two -- maybe two questions in there. One is about information edge that we have, and what do we see in the market. And then, two is, what is the public market not seeing missing maybe in terms of the business model? So, I'll hit them both. We have a huge information edge. That is one of the large benefits of being in the private markets is we have investments in thousands of middle market companies around the globe. We're the third largest developer owner operator of industrial warehouses in the world. Many people don't know that.

We see the flow of goods happening all over the world. We're getting property-level data on lease rates and occupancy rates and where people are expanding, where they're not. That helps inform how we manage what we own, and it also helps us make investment decisions into the new market. And not surprisingly, when we speak about our views, they're coming from a real conviction in the value of that primary information edge.

And so one of the things that we talk a lot with our people is trust your primary information advantage and try to not get sucked into this current world we're living in, which I think is actually making it very hard to be an active investor in the public markets. It's very momentum-driven. It's very dependent on positioning. The velocity of news and information is at an extraordinary level, and it's getting harder and harder for people to kind of find the signal through the noise. And so we always anchor on what we're seeing. And so not surprisingly, if you look over the last 3 or 4 years, we had many people calling for recession. And the tsunami and the tide is going to go out and you'll see who's not wearing a bathing. And we saw none of that because we had all of these data points that were showing us the fundamental strength in the economy was real. And as I sit here today, despite all of the noise and anxiety in the market about AI disruption, about private credit, whatever it's going to be, the fundamentals are still very, very strong.

So we're seeing double-digit cash flow growth in our underlying credit and equity portfolios. We're seeing continued high occupancy rates and NOI growth in our real estate portfolios. We're seeing meaningful growth in demand for the products that we manage. So there's nothing that's flashing anything other than green right now.

Markets have a way of talking themselves into things. So it's not to say that if the anxiety continues that you can find yourself in a traditional credit cycle, but that's not what the numbers tell us.

Maybe to hit the second point, I also think that's part of what's happening in this all narrative. I don't think people understand how durable the secular trend is from public to private markets. They're not experiencing the conversations with the clients and the customers and the investors the way that we all are. So there's a huge disconnect, right?

So if you look at our nontraded BDC, I think we have 900 borrowers in that fund, 0% nonaccrual, 0. EBITDA has grown 10% to 12% over the last year. 2.2, 2.3x interest coverage, 40% loan to value. For the 30-plus years I've been investing in credit, there's nothing in those numbers that screens credit crisis is coming. And so there are definitely narratives that are being put into the market that are just fundamentally not looking at the data. And I try to trust what we see, but then also look at bank portfolios, look at card portfolios.

We're not seeing it, right? You could begin to see weakening in the lower part of the consumer economy, and we should all be a little bit mindful of that, but there's nothing that we're seeing in our primary data or the market data that would tell us that we're anywhere but still growing.

Just the echo chamber of the news real and just hard.

It's hard. I mean, I guess that's what creates opportunity, too, right? And so part of what you have to train yourself on is like what's the information that actually matters to me, not just what's the information that's being fed to me, and I think that successful investors today are very good at focusing on pertinent information and not kind of media.

So the -- away from private credit, one of the other topics that I've heard a lot about over the last two days, not surprising, you mentioned AI disruption. I think everybody in the room, there's an agreement that everyone sees AI as being very disruptive. There's not consensus on quite how the extent of what that disruption is going to be. How are you thinking about AI as being a driver of sustainable growth over the entirety?

Yes, we could spend our whole time talking about this. So again, back to public versus private, right? There's -- it's as if people woke up one day and realized that AI was going to have a transformational impact on the way that we work, live and invest. From the private market practitioner perspective, I can't get my head around it because if you've been investing for the last 5 to 10 years, and you have not been thinking relentlessly about the risks and opportunities that are going to get created from this tech transformation, what were you thinking about, right?

So the public market woke up and said, "Oh, there's disruption here who's going to get disrupted." And then, assume that people who were in the markets hadn't thought of that, which to me is kind of an insane thing. So we have been investing with a view towards AI disruption potential, but also AI opportunity.

And the AI opportunity for us is taking the form of meaningful growth in our digital infra and renewable energy franchise. We're seeing significant scaling in our data center development business. We're seeing significant scaling in our digital infrastructure lending strategies. We're seeing meaningful transformational change in our renewable energy businesses as we try to relieve the power constraint. So one of the things that I think the market doesn't appreciate about the Alt manager space generally is how hedged they are to these different outcomes, right?

So if we believe that AI will be disruptive at the pace of change that people are reflecting in the market, that means that the CapEx cycle is going to remain elevated, and that's a huge opportunity on the other side of the ledger. So you can't just talk about the risk, you have to talk about the risk and the opportunity.

To your point, it seems like the market is just focused on what's the impact on software and how much software do you have in the portfolio?

Yes. And I think that's a very narrow view. Obviously, we've spent a lot of time underwriting and reunderwriting our software positioning, but I think even that narrative came from a position of lack of understanding. And now 3 weeks, it seems like 3 years, but 3 or 4 weeks since that start to snowball, you're now seeing people who are actual experts come out and say, okay, this is actually the limits of the technology. This is how the implementation cycle will occur. These are the opportunity -- and it's getting more rational, but the initial reaction time is quite extraordinary.

In terms of what we're doing, we said on our last earnings call, we have 25 in-flight projects where we're using AI tools to do something that's margin accretive or transformational for our business, places where we're using sales force or automation tools to improve our lead gen and penetration in our wealth sales, AML KYC procedures in our compliance business, preparation of financial models and investment memos to create efficiency in our analysts and associate pool. So it's a combination of front office and middle office transformation, and they're all in flight, and I think they'll all have real impact.

I don't know that we're yet at the place where it's transformational impact, but the sum total of all of those projects that are being piloted and implemented will create some pretty meaningful efficiencies.

And it seems like the market is looking also to make sure it's measurable.

Yes, I think it has to show up in margin expansion or productivity gains in some part of your business. And I think any company, whether you're an Alt manager or another, if you're going to talk about it, you're going to have to come demonstrate ultimately what the results are going to be.

Let's shift gears a little bit. You've always been a passionate lover of sports. The -- so not surprising to see Ares emerge as not just an early mover, but also an active mover in the space. What is it about the economics of sports that gets you excited, and you see this long-term investment -- positive investment theme?

Yes. This is a good example of organic business build. We started our -- meaningfully are reorienting our sports investment franchise in March of 2020. Prior to that point, we had distributed investments in our traded credit business. We had some in our private equity business and our private credit business, but it was always distributed. And then if we were making investments in sports, media and entertainment, we'd kind of go find the experts around the platform. The unlock for us was just based on individual investments in sports.

When COVID hit, and we saw that there was going to be a meaningful disruption in the live entertainment market, sports, concerts, arena based events, we saw an opportunity to become that solutions provider because there were a lot of people who owned assets or venues or touring companies that were not going to have any revenue and they were asset rich and potentially cash poor. And that's kind of where I think we thrive is going into the market as a real creative liquidity solution provider.

We already had good relationships with a lot of the players in that ecosystem. We knew a lot of the folks at the league level, and we very quickly reoriented the business to be a sports, media and entertainment dedicated coverage and investment model, organized teams around all of the major leagues around the globe did a lot of missionary work with league commissioners and owners around the value of institutional capital in the sports business, and then started to go to our investors and talk to them about the opportunity. We spun up a very large fund in a matter of months, and then started investing into the distress, which then became nondistressed and accelerated, and now we have a leadership position there.

The other thing that we did well, which is highly differentiated, we didn't just say, "Hey, we want to come in and buy a minority stake in your team." We said, how can we help? Can we unlock value in your real estate? Can we talk to you about media rights securitizations? Can we monetize a piece of tech IP that you have? So we were doing investing up and down the capital stack as a solution provider, which then engendered trust, which now that the market is fully open is -- has us in a position where we're in almost every dialogue that's happening around the sports ecosystem.

Particularly when more capital now, institutional capital is chasing it.

Yes, which is great for the asset class. So the reason to love sports aside from the fact that everybody kind of understands it is the value of unscripted live content continues to go up. And in this -- not to go back to my media ran, but we're also in a content deluge, right? Like we're producing so much content that we're never like in our lifetimes are we ever going to be able to consume all of this, but unscripted live sports is the most premium content that we have, and people are placing extraordinary value on that.

And so you could see the value of sports teams tracking the value of content. And as that ecosystem grows, everything around the sports team from youth sports development, stadium management, sports tech, all grow in value as well. It's uncorrelated to anything else in your portfolio, and we've run this 6 ways to Sunday, if you were to look at a diversified portfolio of sports investments against traded equities, private investments, you're not going to find correlation.

It tends to be inflation protected and it's a store of value just because there's a finite number of assets at a time when money is finally able to flow into the asset class.

Prior to 2020, institutional money wasn't allowed in sports. So if you're an owner of a sports asset, now all of a sudden that incremental liquidity is just going to continue to drive values up. So I think there's a store value and supply demand of liquidity that's going to continue to see those assets escalate.

It seems like a good time to become an owner of a baseball team.

We'll see. Everyone catch on, like room fully Yankee fans, that it was like a lead balloon.

I figure, they're sleeping from the steak that was served for lunch. The -- so private capital has evolved from going from an opportunistic part of portfolios more to a sort of an institutionalized part of the allocation. And you're seeing that on the institutional side, you're increasingly seeing that on the retail for the individual, the democratization of capital and private capital, and whatnot. What do you think still needs to develop from like market structure and governance to transparency is one that a lot of folks are talking about, particularly in this climate right now. And then I'll just add one extra thing. It's -- what do you think needs to develop, and who's responsible for doing that? Is that the individual firms? Is it the entire industry? How do you sort of see that?

It's a good question. There's a lot to unpack there. I think everyone is responsible, right? If you want to promote stability and growth, the asset managers are responsible to deliver performance, transparency and a good client experience, but clients are also responsible for kind of articulating structural need and promoting good governance. And in the institutional market, that's there, right? So there's not a lot that needs to happen, if anything, to see continued growth in institutional demand for Alts.

I think we're all getting better at delivering product into the institutional market. And again, it used to be private equity, private credit, and now we're able to actually offer multi-asset class, multi-geography product and deliver solutions to the investor. I think all of the things you asked about are largely going to be this discussion around individual investor access to private markets investing, and that's going to take time, and it's going to take time for structures to get challenged and tested. Technology needs to keep pace with the needs for pricing transparency and all of those things.

I think the industry is a lot farther along than maybe the current headlines would have you believe, but whenever you're going into a market that touches an individual investor, by definition, the governance and transparency standards from a regulatory standpoint are going to be higher.

I do want to hit on one thing about transparency because as long as we've been in private markets, we've heard this. I think it's important that we say transparency to who. So if you're an institutional investor of Ares Management, you have line-item access and monthly performance data on everything that we manage on your behalf, right? So if you were to call a large pension fund and say, do you feel like you have transparency into your private markets exposures, they would say 1,000%.

That is not a nontransparent market. It's not transparent to certain people who don't have access to that information. So when we talk about a lack of transparency, I think, it's important that we talk about -- what we're really saying is if we're going to move into parts of the market that get us into a different regulatory framework or touch a different client and there's a requirement for more transparency to the regulator or to the investor, that's a conversation. But I do think it's important to kind of dispel this idea that private markets are not transparent, because they're incredibly transparent relative to what you could get if you were to look at, let's say, a bank balance sheet. They're incredibly transparent in terms of the level of access you get to information relative to public markets. I see folks here from CNB who lend to us, line item access to information, so it's a little bit of a false narrative.

Why is it -- why is that getting lost?

I think it -- and I think part of it is, if you're -- if you spend your whole life, either in a regulated market or a traded market, and all of a sudden you see over 30 years, the evolution of a large growing private market that kind of operates in a different regulatory structure, a different cadence of information flow, a different underwriting standards. Like it's just -- it's completely foreign to the entrenched way that people used to access investments.

And I think that just promotes -- I don't even know if it's misunderstanding, but it promotes bad nomenclature, right? Lack of transparency is probably not the right word. It is, to your point, if you want to see it scale, who else needs access to this information in order for it to scale the way that we all want to see it scale, right?

So it maybe isn't lack of transparency, but it's more how do we expand transparency to people who we feel should have access to it. So I think some of it is just definitional, but I think a lot of it is, it's fairly new to a lot of people who are used to buying loans and bonds and equities or -- and they just don't really understand that the long-term relationship of a client and a private investor and the investor who gives that private asset manager money, that's a closed loop 7- to 10-year system where there's perfect transparency and perfect clarity on what everybody is kind of managing to, and even that's misunderstood, right?

Because people are choosing to borrow in the private markets or raise equity in the private markets because they want a long-term stable partner. They don't want syndicate. They don't want distributed partnership. They want to know who their partners are. They want to know that their partners actually have the flexibility, scale, access to drive their business plan, and they want to do that over long, long periods of time. So you're going into these markets for that illiquidity. You're going into these markets for the lack of NAV volatility.

So again, if you're wired to the traded markets that may not -- it may not make sense, but the entirety of the business is starting from the client appetite for deep partnership. So that -- it will just take time. But again, I think as more people see it as we go through more cycles as the asset classes get tested, and you can see how they perform, that will promote continued growth.

The -- so some folks out there have been pretty vocal about how the complexity, the uncertainty, the volatility is likely to drive a shakeout, not surprising, right? The -- as you look at the industry, what do you think is going to determine who are going to be the winners and who are going to be the losers? Is it risk management? Is it platform construction? How do you think about that?

It's all of the above. If you think about the playbook in Alts to perform through cycles, diversification top of the list. So you have to be diversified in your product set. You have to be diversified in your distribution channels. You have to be diversified in your geographies.

So back to my earlier comment, if M&A slows down, and your regular way private equity business isn't deploying, your secondaries business should be growing. If there's a narrative of outflows in wealth, which by the way, on an aggregated basis, we're not seeing, but if there's a narrative of that, that means your institutional business should kick in. So the value of diversification on all of those fronts is key. And the value of the institutional franchise is also a key.

So we are coming into this year with about $160 billion of our $625 billion uninvested, dry powder. If you were over-indexed to wealth or annuity sales, and there was a slowdown in that market, which tends to be more procyclical, you can't actually either defend your existing positions with your dry powder or take advantage of this vintage of what should be higher return because you don't have the dry powder.

So I think those that have real durable institutional franchises in a market where there's a little volatility happening in the liquid and nontraded markets, that will be a big driver. And then portfolio management is table stakes. And the ability to protect value and grow value in volatile times, ultimately is what will differentiate you and drive outperformance. And those that out will get funded and grow. And the last thing I'll say, I think what will -- the result will be continued consolidation of more dollars in the hands of the fewer scaled players, because they have diversification. They have scale. They have depth of relationship with the Street and the investors. They have the ability to invest in portfolio management and people. They have the ability to invest in systems.

And so our experience has been, over the last 30 years, with every cycle, there's a reconsolidation of market share, and I think this one will be no different.

So I want to end. I'm looking at our clock here. I want to end on some stuff around culture and leadership. I know those are two things that you are very passionate about. You and Nelly are very involved in giving back to the community. You've all got various causes and organizations, operation hope, New York Presbyterian, all the work that Nelly is doing around Center for Discovery. When I was doing some work to prepare for this discussion, I had not been aware of your efforts to also tie carried interest to charitable giving. It's -- you got some of your peers here. It seems like a pretty novel positive.

I appreciate bringing it up. It is passionate of mine. I go back to -- when we were in the key club together in middle school, true. I think you were the President, right? But in all seriousness, this is something for me as a leader that I'm probably most proud of. We talk about culture as a driver of performance incessantly because back to your point about trust capital and how we do the business, that is probably one of our biggest competitive advantages is this culture of collaboration that we've created. We've always been philanthropic in the ways that a lot of companies are volunteerism, the community engagement stuff like that, but about 6, 7 years ago, we had a portfolio manager come to us and say, "Hey, I want to take 5% of my promote and start to put it towards philanthropic causes that I'm passionate about, will you match me?"

And we said, yes, and that was three fund series ago. And then what that led to was actually the standing up of the Ares Charitable Foundation on the heels of that, where we now take a meaningful percentage of our performance income and put it into our charitable foundation around places that we think will be force multipliers for the communities that we live and work in, job reskilling, financial literacy, entrepreneurialism, places where we think as business people and business builders, we can make a difference.

The combined total of those commitments already in the last 5 years is hundreds of millions of dollars and scaling as the firm scales, and our people are attaching to that work in the field in a way that's really inspiring sitting on boards, interacting with the grantees in the field. And then the last piece, which is the next evolution, and this is my pitch to all of you, we've created an entity called Promote giving where we've actually invited other people in the asset management business to take the pledge with us.

So donate 1% of your promote in a fund, start small if you're not ready to go big in a fund and come along for the journey with us. You don't have to invest it through our foundation, but join us in that journey, and we've already signed up in other asset managers to us to come along with us on that.

And so I think it has changed what was already a strong culture because if you think about who invests with us, it's all people who are focused on their retirement, both stability and growth. And so what it's really done is oriented our people from coming in every day and not just thinking about how do I make great returns and how do I get paid to now saying, who am I actually generating returns for? And so there's a big mindset shift that happens when you're not only generating returns for the retirees that you're managing money for.

But now if you do well, you then get to reinvest in some pretty needle moving things. So that's been a big passion project that's taken us 5 years, but it's now at a scale and inflection point that's pretty exciting. So I appreciate you bringing that.

No, we're going to put a sign-up sheet outside the...

I would love that. So we hope you could find it on our website.

It would be like the BDC panel we had yesterday, there will be so many people around round lining up for that. Congratulations. That's fantastic. I've watched the culture. We talk a lot about culture. It's sort of -- it touched quite a few of our questions today. The -- you have a differentiated culture. I've seen it upfront, up close, I would say, in experience, strong culture comes from strong leadership. You've led through lots of different periods of volatility and uncertainty and disruption, any wisdom to share with this group as we finish up here?

Well, I think the first thing, as I said earlier, is train yourself to slow down and find the signal through the noise. I think that people can get really sped up in moments like this. And it's kind of a sports analogy too, where people talk about slowing the game down. I think you have to really slow the game down. I think you have to trust your training, and then at least, as a leader, like we did a town hall with all of our employees yesterday. And one of the reasons for that was just to remind everybody, about how well positioned the company is and how big of an opportunity volatility presents because oftentimes, we take it for granted when you've been through multiple cycles that there's a playbook, and this is how you execute, but there are a lot of people who haven't been through volatility before. So I think as a leader, and I would say this to anyone, don't assume that the younger folks in your organization are actually experiencing volatility the same way you are with the same enthusiasm. They may be having a completely different experience.

And I think that's just a good reminder as people develop as leaders to kind of put yourself in the shoes of the people that you're leading and not just lead from the front all the time. And -- so that was a really empowering hour with our troops yesterday, because I think you got everybody reoriented to the opportunity.

And I'm going to leave you with one last thing because I know that we're out of time. It was an hour of open Q&A, and one question that got asked was, how do you execute on the playbook while maintaining humility and grace in the face of other people, like not doing well. And I raised it not as a question, but as just a conclusion to the conversation because I thought it was so emblematic of the way that people at Ares think, right, which is we're going to go out and we're going to take advantage of whatever volatility is there, but we're going to do it.

With grace.

With grace in the right way and not take advantage of people's distress, which, to me, brought the whole thing full circle.

As I said, culture is driven by leadership. And some folks asked me, what was Mike like? You've known him for 40 years, and I said, hand on heart. This guy is the same guy. He was when we were hanging out in your backyard, sitting around the Keg when your parents were away from home. Truly, the absolute same guy, and congratulations on all the success. Thanks for joining us today.

Thank you.

I'm proud of you, Mike.

Good morning, everyone, and welcome to Bank of America's 34th Annual Financial Services Conference. This is Craig Siegenthaler, North American Head of Diversified Financials, and I'm very pleased to introduce Michael Arougheti. Mike is a Co-Founder, CEO and a Director of Ares Management.

Mike, thank you for joining us today.

Thanks for having me. Always good to be with you.

So Ares is one of the largest alt managers in the world with a world-class business, including its #1 noninvestment-grade private credit franchise. Five years ago, the firm managed around $200 billion in AUM. Now it's $600 billion, 3x.

With that, let's get started with a big picture question on the macro front. So we've entered year 4 of the bull market IPOs and M&A are expected to accelerate. The Fed is cutting rates, but spreads are tight. Also private equity realizations are expected to rebound, but they've been depressed for a while. How do you see this macro backdrop playing out in 2026 for the industry and Ares specifically?

Yes. Thanks again for having me, Craig. It's always good to be with all of you. Look, we're very constructive on the deal environment for 2026. If you go back and listen to some of the commentary around our third quarter earnings call in the fall, we said that we saw pipelines beginning to accelerate into year-end and that those pipelines were both new transaction driven, but as importantly, diversified across each of our businesses.

We came through the end of the year. We continue to see the acceleration. And as we just announced on our earnings call, we had a record fourth quarter, about $46 billion of capital deployed in Q4. And we also said on our earnings call that as of the end of January, our pipeline, which we track across all of our businesses was at a record high in January, which usually is a good predictor for transaction volumes within the first 6 months of that determination date. So the markets are obviously having some AI jitters, which we could probably talk about a little bit later.

But given everything that we're seeing fundamentally, as you mentioned, constructive rate backdrop, pro-business administration and a deregulatory stance, banks derisking and driving capital markets activity, real estate volume is picking up after valuations have troughed, aging of private equity portfolios and dry powder, there's just a lot there to catalyze deal flow. So barring any unforeseen macro event, which is always a possibility, we would think that the transaction volumes will be pretty healthy this year.

Great. So I know you said a little bit later, but maybe we can...

I was just hoping we could push it to the very end. We're running out of time.

So we can't get through a fireside chat without hitting on software AI disruption, which became a really big topic after Anthropic's Claude launch like a week ago, but I guess it feels longer than that. But I think it's important to note that a lot of what you do is private credit, we're talking 30% LTV business, so big cushion sort of in front of you. And even on the equity front, not all companies are created equal. But from your seat, from more of a private market lens, what is your perspective on what just unfolded? We knew a lot of this a year or 2 ago.

Yes. I don't want to consume the entire conversation on this issue, but it's interesting because as a private market practitioner, we try not to get whipsawed by the headlines of the day. It is quite odd to us that the public markets have woken up to AI disruption as a theme. If you've been investing over the last 5-plus years, and you haven't been thinking about opportunities and risks created from technology and AI implementation, you've probably been asleep at the switch.

Before we talk about the software narrative specifically, I think it's also important to understand that for every company that gets disrupted, there is probably a company that's getting improved. Margins are expanding, productivities, expanding. They're able to invest in growth in new ways as the AI revolution continues to proliferate, you're going to see meaningful, meaningful opportunities to invest in digital infrastructure, renewable energy, transmission.

So from the Ares Management lens, given that we are balance sheet light and not owning these exposures directly, we're feeling pretty good, if not great, about the way that we're positioned given the dry powder that we have and given the fact that we expect that this will create as much opportunity to go on offense as risks in the portfolio. So again, I think this narrative right now, at least as everybody is digesting, it feels very one-sided and everybody is anxious about risk. And I would just encourage everybody to be thinking about what does that mean for everything else in your portfolios.

And then to your point on software specifically, I think software is a little bit of a misnomer and folks should be thinking not just about software, but generally about technology transformation and AI disruption. If you're a business services company or a health care services company or a technology business, you are either going to have risk or opportunity from AI implementation. This is not a software issue. So I think, again, that the market is too narrowly defining what the set of issues is in front of them. And again, we'll eventually get there.

When we look at our portfolio, 6% of our exposures are to software companies, broadly speaking, across the waterfront. These tend to be enterprise software businesses where we have 2-sided networks, meaningful proprietary data moats, mission-critical systems. It's not to say that every exposure we have is immune. But obviously, as I said earlier, the first question we've asked ourselves across everything in our portfolio for the last 5-plus years has been what is the opportunity and risk from AI. And so not surprisingly, when we now go back and continue to re-underwrite the exposures we have, we feel like we're very well mitigated.

Great. So let's probably hit on a more important topic. What are your strategic priorities for this year? You've gone through an active period of M&A, really transform the business. You don't really have a lot of product gaps yet. But last year, you did talk a little bit about private equity, an area you could be bigger in. So when you take a step back, what are the strategic priorities today? And when you rank them, does private equity come out in the top 5?

Private equity actually does not come out in the top 5, but I'll cover that because I think it's an important thing to keep in mind when you think about our potential future growth and the way that the market is developing. Probably top of the list is continued expansion in our digital infrastructure business. We bought a company called GCP last year. The investment thesis there was to, one, grow larger in Japan. We think we acquired the preeminent real estate manager in the Japanese market, and we've been quite happy with the product set and the performance there. Two, it was to diversify our global industrial real estate business. We are now the third largest developer owner-operator of warehouses in the world, which many people don't know.

And then third, we acquired a data center development capability of about 85 people under the brand Ada Infrastructure. And alongside that data center capability came a data center pipeline of very large build-to-suit hyperscaler projects across the globe in Tokyo, Osaka, London, Sao Paulo, Northern Virginia. And part of the thesis was that we would take the existing Ares digital infrastructure capabilities, the existing Ares renewable energy teams and then accelerate into this data center development business.

And that's been a big success in the first year. We closed a $2.4 billion Japanese data center fund. The pipeline that we've articulated publicly requires another $6 billion of equity just to get done what's in front of us. And so that's something that we're working on now. So I think #1 priority is just continuing to lean into the momentum there and ride the secular tailwinds in that business.

Two, as I mentioned, Japan. We already have a large business in APAC. We now have a very meaningful foothold in the Japanese market with a market-leading position in real estate. The goal will be now to continue to diversify the product set off of that real estate strength in the Japanese market into things like private credit and infrastructure.

Third will be the continued development of our vertically integrated real estate approach. We are now, I think, the third largest institutional real estate manager in the market broadly diversified across geographies and product types. And we've been going through a very intentional and systematic move to become vertically integrated, meaning that we want to develop, own and manage our own real estate as opposed to many institutional real estate investors who are partnering with operating partners or buying developed product that's been stabilized by third parties.

The reason we're focused on that is, I think as asset management matures, those that can create their own asset flow and own them for the entirety of their life cycle will have competitive advantage. We're very far along in that journey in industrials. We're very far along in that journey in multifamily, which represent close to 90% of the exposures that we manage. But we still have some work to do to just continue to fill in that capability.

And then lastly, and maybe speaking to the AI conversation, we are very focused now on capturing margin opportunity across the entirety of our business. There's a lot of work happening strategically to consolidate our middle office functions and drive efficiencies. We've been showing really healthy margin improvement over the last number of years, but I think we're at a place now in our evolution where we can really accelerate that with some intentional investment in technology and organizational redesign.

Private equity, we have said publicly and it got amplified by an article in the FT that we have an open mind to being bigger in private equity. It's interesting. If you look at the history of the firm, we started off almost equal weight private equity, private credit and liquid credit. And just given the growth that we've experienced in other parts of our business, private equity hasn't kept pace. That's neither good nor bad. It is what it is.

The argument to be bigger in private equity is, one, our institutional clients are all large investors in private equity. And I think as they consolidate their wallet share with fewer and fewer managers to the extent we had a broader private equity offering, I think that we would see meaningful inflows. Two, it does give you a skill set as an owner and operator that you don't get at scale in other parts of the business. And so a larger private equity capability would be able to be leveraged across other parts of our business in terms of value creation, management and operating relationships, and that's something that we think is important.

Third, in this world of growth in wealth and retirement, in order to deliver equity exposures away from secondaries to the end investor, you have to be large enough that you can have enough line items to deliver diversified exposure. So we actually think that if we can get large enough, it would actually benefit our ability to deliver unique product into wealth and retirement.

The reason that we're open-minded, but don't have a sense of urgency around it is the private equity business in and of itself is not a growth business. We've been very focused, as I think many of you know, in delivering consistent predictable growth in our FRE and our RI to the tune of 20% plus. Private equity does not compound linearly the same way that the rest of the business does. And so if we were to do it, we would have to do it in a way that we were able to account for the slower growth in price and in high conviction that we can actually drive the revenue synergy that I just talked about.

Well, sticking with that target, I want to hit on some of the guidance you gave us at the 2024 Investor Day. You've actually raised some like your wealth AUM target. And other areas like fundraising, FRE margin really performed well last year. As you sit here today, how do you feel relative to these targets? I thought maybe you could highlight a few that you feel pretty good about?

Well, we just reaffirmed them on the last call. So just to remind everybody, we've said that we hope, and this is ex acquisition organically to grow our FRE 16% to 20% plus per year. We said that we expect to grow our RI 20% plus per year, and that's been reaffirmed as of last week. We did raise our wealth targets. That's just a simple math. If you were to run rate the experience that we're having now, just given the diversity of product that we have and the growth, you'll get to the [ $125 billion ] if we don't see acceleration in that growth. So I think we have high conviction in that change.

And then lastly, we just announced our dividend for Q1, which was up 20%. And for those of you who have not been following the company, we try to peg the dividend to our expected FRE growth, and that's been a pretty consistent capital management distribution policy for the company. So the dividend increase 20% hopefully gives people increased confidence in the guidance.

Great. I wanted to dig a little deeper into private credit. I mean arguably, you're the #1 non-IG private credit ABF lender in the world, very large...

My mom would be so proud. I'll tell it.

But let's see. So long-term performance here has been much stronger than peers. And another barometer is you raise these huge institutional funds that many of your peers actually can't. So how are you able to do this? What's the secret sauce? How has performance been so good for so long?

Trying to think how to tackle this because there's a lot of important things to talk about. We -- look, we've been lending institutionally for over 30 years. And if you go back even to the early 2000s when we were building the business here, very few people knew what private credit or direct lending was. And so at the risk of sounding modest, I actually think that we were pioneers in the business.

And one of the first realizations we had was that the way you were going to win over the long term was to out-originate people. And the reason that's so important is driving performance and credit is about being right almost 100% of the time, right? You have asymmetric downside risk because if you're wrong, you can lose all of your money. And if you're right, you can make your coupons. So you have to be right 99% of the time, if you really want to outperform.

And in order to do that, it has to start with building these really, really broad origination funnels and being selective in what you choose to invest in. So for our entire history, it's been origination-led with an understanding that, that allows us to drive really, really high asset selectivity. And that has never changed. Even today, we invest in only 3% to 5% of the transactions that come across our desk. So we say no, 95% to 97% of the time. So that's number one.

Number two, we also learned over time that scale was actually a driver of performance. And the reason for that was, one, as you grew, you could invest more in these deep origination networks, more offices, more countries, more people, more product. Two, it made you more relevant to a broader set of borrowers in the market. Even today, if you talk to a smaller private credit firm, they will tell you one of their greatest frustrations is they identify a good borrower, they grow and then they leave their portfolio. So we constructed the product set to grow with the borrower as they grew so that we can hold on to our highest quality borrowers longer, and that's a function of scale.

It's also a function of product flexibility, right? You need to meet the client where they are, if they need a mezz loan and you're only a senior lender, you're going to lose the client. All of that drives one of the most important drivers of performance, which is incumbency. So if you were to look at our deployment in any given year, about 50% of our investments in private credit are to existing borrowers where we have a long-standing relationship. So that allows you over time to just continue to re-underwrite your best-performing companies and your exposure to them just compounds with their cash flow growth. So this is probably one of the most misunderstood parts of our performance, but also the growth in private credit.

Our portfolio has generally compounded 10% EBITDA growth or more. And so if all you do is continue to grow and stay at the same attachment point with those borrowers, you're going to enjoy 10% growth in your private credit book with high quality performance because you get to re-underwrite those investors. So when you're talking about a market that's growing 15% compound and everybody is anxious about that linear growth rate, half of it, if you're doing it well, is coming from embedded cash flow growth in our portfolio and half is coming from new investors, new clients.

And then the thing that I think is most important about the outperformance is when you've been doing it for 30 years, and you see the entirety of the market, you develop really deep industry expertise in terms of where you want to lean in and where you want to avoid. And all of the information that we capture is not just on that 3% to 5% that we said yes to, it's on the 97% that we said no to. And so the information advantage that we've been able to create over 30 years of aggregating this information and seeing the performance over hundreds of billions of dollars of investments has led to this competitive advantage that compounds.

And to your point, if you look at our public track record, which I think is a good proxy for our entire track record, we've had a compound annual return in excess of 12% for over 20 years with close to 0% losses. So that's pretty good, but it also is why we also have so much high conviction that when we go through periods of time like the one we're now where the markets get anxious, that this is actually a time for opportunity, not a time for risk.

So last year was an interesting year in private credit, where if I look across the industry, I see a lot of funds doing 8%, 9%, 10% returns, pretty good. And credit quality on average, maybe not as good as 2 years ago, which was unusually strong, but still pretty good relative to history. Yet there's a negative narrative out there, especially around the media in the second half, and it did hurt our retail flows a little bit. So it was kind of weird because the fundamentals are still pretty good. So from your seat, what did you think of this whole dynamic?

It goes back a little bit to my earlier comment about AI. There has been, as long as we've been in business, there's been kind of a persistent hum in the market about risk in private credit. I could go back and show you articles as early as 2005, about all the risks in BDCs and private credit and lack of transparency. And I think it probably first and foremost, comes just from a place of misunderstanding, right? If you're very wired to public capital markets and you're not attuned to how the private markets are developing as a synergy in a supplement to public markets, it would be pretty scary if you see these markets growing.

And two, at the risk of sounding cynical, I think that there are a lot of entrenched players, whether it's rating agencies or banks that don't want to see the private markets develop the way that they are developing because it actually hurts their core business. And so I think the media more than anybody has kind of picked up on this and is trying to promote the narrative. I can tell you when we talk to our large institutional clients, there's no anxiety about risk exposure in private credit.

And even in retail, you mentioned, while we did see redemption queues, we did not see outflows. And I think that's also important. Net flows in wealth to private credit were actually positive. And for the leading managers like us, they were meaningfully positive. So even that narrative when you see 97% of your investors in wealth not wanting to redeem, that should be the story. It should be the durability of those exposures and the continued appetite, but yet the story is 3% of the investor base wanted to redeem. So I think it's important.

We got to keep educating. We have to keep performing with each cycle of performance through volatility, the asset class gets more durability and legitimacy broadly. But I can't quite put my finger on it. It's frankly a frustrating narrative for folks like us who have been doing it a long time. But I don't actually think that it is going to have a meaningful impact on the business. You and I have talked about this. I think it's important too. We've tried to construct our product set and our fund families to be able to actually go on offense when the markets dislocate.

And if you look at our history, it's interesting. Our 2 fastest periods of growth were through the GFC and through COVID. And one of the ways that we do that is all of those competitive advantages that I just talked about in terms of scale and capital, but it's the combination of institutional dry powder and wealth working hand in hand, right? So if you think about the position of Ares in, let's say, U.S. direct lending, we have very large institutional funds, as you referenced earlier. We have very large traded funds, very large semi-liquid funds and SMAs. That allows us to have very, very diversified portfolios, where no single exposure will impact performance in any fund.

But that dry powder, which now sits over $150 billion on the platform, uniquely positions us to actually be a capital provider into a dislocated market. Whereas if you're relying on wealth or reliant on annuities, sometimes those flows will dry up and you're not going to be able to lean into the dislocation, the way that you probably want to. So we're hyper attuned to making sure that even as we grow these other parts of the business that the institutional business is still large and that we have those big dry powder stashes.

So with the pro-business agenda of this administration, one area is that seems to have a benefit is the banks where you've seen more tailwinds on the regulatory side, SLR, Basel III end game. If banks go a little bit more on the attack, how does this impact your business as one area is to the BSLmarket, but also they could be more lending more aggressively in areas where they'll hold things on their balance sheet, too. Are you seeing them compete more?

So this is another example of a one-sided narrative, right? And the narrative that people want to talk about is banks take more risk and there's a war going on between private credit and banks for market share. Fundamentally not true. The banks and private credit managers are incredibly symbiotic. It's important for us back to being hedged against the different outcomes. We've developed a private credit business that is playing across the entire spectrum of size companies in the middle market, $5 million of EBITDA up to $1 billion plus.

There is a portion of our market where when the banks derisk, we can move in and be a capital provider. And when they're risk on, they're going to put some of that product into the broadly syndicated loan market. That's not the entirety of the private credit market. It's actually a very small percentage of exposures. But what winds up happening when they do that, CLO formation increases. We are one of the largest CLO managers in the market and a meaningful sales and trading partner to the banks like BofA. And so to the extent that BofA is risk on in BSL and high yield, we then are a very reliable partner to the banks on the CLO and sales and trading side.

The other thing that people probably don't understand is the banks, when they're increasing the exposure are generally going to be going after IG exposure. They're not rebuilding deep origination networks in sub-investment-grade credit. So when you see the banks actually feeling like they have capital relief and want to take more risk, that probably means 2 things for us. It means that they're putting more capital to us in the wholesale lending business, which is driving the cost of our capital down and driving our returns up. And it also means that they're probably talking to us about ways to use our balance sheet to help drive velocity of capital on their balance sheet.

So if you look at what's happening now, as they're continuing to drive competition into the BSL market, we're seeing more capital available to us on our own balance sheet. And we're talking to them about portfolio sales, SRTs, flow agreements, ways that we can help partner with them to monetize the client franchise because we fundamentally do different things. So again, if you were to see us interacting with our bank partners, it's usually, if not always, in the spirit of partnership and working together and not competition and a battle for a very small sliver of market share.

So over the history of the private credit industry, the BDC industry, I mean there's always been a few bad apples. So as you come forward today, do you think the industry is in better shape today? And also, are you seeing any underwriting going across the industry that sort of maybe makes you a little nervous in areas that Ares is not participating in?

I think that -- look, the BDCs are, again, a smallish portion of the aggregate private credit industry. If you're asking are BDCs, generally speaking, today, better positioned than they were 15 years ago, absolutely. I think the quality of manager, the size of the BDCs, which can drive diversification, the sophistication of management to make sure that the dividend is being protected and well structured. I think they're fundamentally better than they ever have been.

But to your point, there are still some managers that are, if not bad actors, not good investors. But back to the headlines, you can see -- we're getting headlines that pop up every time a loan goes bad, and it's being extrapolated that private credit is hiding risk. And I think, again, that's problematic. The private credit market is very concentrated. That 65% of the capital is sitting in the hands of the top 10 managers, and then there's everybody else. And so you could see poor performance in the other 35%. That doesn't mean that, that is going to reveal itself in the top 65% because of all the things I talked about before in terms of the advantage of scale and incumbency and diversity.

So I do think you're going to see dispersion of return. You're already seeing it in the nontraded and traded market, but that doesn't mean that, that's an industry index. I think you have to zoom out and look at the big players first and then look at the small players. And generally speaking, I think the big players are rational. To your point, we're not seeing bad underwriting. We're not seeing people buying market share like we have in the past. So it's -- I think it's stable, rational and performance for the top players continues to be quite good.

So 10, 20 years ago, there were a lot of BDCs that had significant declines in net asset values, and they got almost no attention from the media. Now it's a little more sensitive. But returns in private credit, they were outperforming in '22, '23 versus private equity and other asset classes. Now it's more narrow or even not private equity outperformed private credit last year, which it should do most years. At this moment, do you think there's an under -- there's a rotation going from private credit to other alt asset classes, especially in the wealth channel?

Yes and no. If you look at alts generally, I think most institutional investors and most individual investors are still meaningfully under allocated to alts. So the reason I say yes, no, it's hard to answer that question because it all depends on where the investor is in their own alts journey. There's a huge tailwind of people who are just coming into the market that are a retail investor buying a semi-liquid product for the first time or a mid-sized institution that's beginning to rotate more aggressively into alts. So it's hard to look at the industry-wide penetration rates and really see that.

I think for those that have mature private credit portfolios, their appetite for private credit continues because they are still generating excess return. Even though it may have narrowed, it's still 150 to 200 basis points in excess of the traded alternative. In other market periods, it's been 300, 400, 500 basis points, but they're still getting excess return. The investors, particularly on the institutional side, who have been meaningful players in private credit are looking at other parts of the private credit landscape for excess return.

So not surprisingly, if you've been an early adopter of corporate direct lending, you may be looking at asset-based finance or infrastructure lending or real estate lending as a way to grow and diversify private credit exposure, not to replace your direct lending exposure. So the way I'm experiencing it is the incremental allocation may go to other places, but we're not seeing an active rotation.

So I wanted to hit on wealth. I think you have 8 products now in the wealth channel. I mean you don't have that many product gaps left. You've been more selective in building out distribution, I think, trying to avoid maybe some of the redemption waves that some of your peers have seen in prior years. Maybe talk to us about your strategy and where you want to see it go in the next few years?

Yes. We -- it's interesting. This is -- I think this is consistent with the way that we've built the business over the last 25 years, is we want to make sure that when we're going into a market or an asset class or a distribution channel that we have a right to win and that we understand how it's going to affect other parts of our business. And so sometimes it looks like we're moving slowly. But behind the scenes, we're doing everything we need to do to set ourselves up for success. Wealth is a good example.

If you look at the history of our private credit business, it actually started with ARCC in the traded market. And we then segue that into a large institutional franchise and wealth came last. And that was by design. I think as I mentioned earlier, we understood through the management of ARCC, the challenges of the structure. The positives are lots of flexibility, lots of diversification, permanence of the capital base, but much more procyclical. And if you look historically at the retail markets, they would be wanting liquidity when they should be investing and vice versa. And so very difficult to build a durable investment franchise if your capital is procyclical.

And so when we saw the growth in wealth, we understood that, that market was growing, but we had to make sure, as I said earlier, that it was never going to overwhelm our ability to deploy and that it was not going to overwhelm that institutional franchise that is kind of the core driver of our business. But once we felt that we were set up to do it, we made appropriate investments and we're now 10%-ish market share player, top 3 distributor in the channel, and that's kind of a happy place for us.

The market is evolving and has evolved quickly. If you look at our business, as an example, the amount of investment one needs to make to build a global wealth franchise is quite significant. We probably have 185 people, 30% of our flows are coming from non-U.S. markets, 8 products, significant distribution expense to spin these products up and get them scaled, significant investment to get these funds seeded and drive track record. So my own view, self-serving to say it is if you're not a meaningful player in wealth now, you're probably not going to be just because the amount of investment, both P&L dollars, balance sheet dollars, but people that it would take to catch up, it's too much given how developed the market is.

So our plan is going to be to continue to diversify our distribution with our core product. These products are all scaled and scaling, and they deliver the best of Ares with very unique outcomes around durable yield, tax-advantaged real assets exposure and diversified equity exposure. And behind those 3 themes, we're going to continue to drive the product. I think you'll see at the margin some new product innovation, particularly in the non-U.S. markets where there's more appetite for geography-specific exposures. But generally speaking, if we never added another product, the guidance that we've put out is intact.

And it's interesting because it's very hard back to my procyclicality to control flows in wealth because you put the product out there and then it ramps pretty aggressively. So we've been also very intentional about how we're building our distribution partnerships. So today, we have about 80 different distribution relationships within the wealth management sector. Half of those only have one of our funds. So part of what we're doing is we're building that stable of core relationships for product distribution, but we're slowly giving them more and more product as we're ramping. So it feels like our relationship network, while we can continue to build it, is very well developed. And now it's just a question of deepening penetration within the existing distribution partnerships that we have.

Great. Well, I have 1 AI question left, but I wanted to leave time for a question from the audience. So if anyone has a question, please raise your hand. All right. Let me go at the AI question.

So Mike, I'm very curious how you're employing AI today. What do you think you'll be doing in 3 to 5 years? And then also, when I think about the business, is the output that this will drive the FRE margin higher and maybe better investment outcomes?

So the answer is both of those, and I'll come back to that. Folks may not remember this, but we brought a team of people into Ares probably 3 years ago through the acquisition of an AI venture firm called BootstrapLabs, small-seed and Series A investors who have been investing across the AI ecosystem for 15 years prior. And the investment thesis on bringing them in-house was to have experts who are seeing developing technologies that we can evaluate risk and opportunities, as I said earlier. And that we could then deploy some of those tools and expertise broadly across the business to drive efficiencies, productivities and hopefully, better investment outcomes.

That capability sits within our corporate and operational strategy group so that we can deploy it across the platform and into our portfolio. And that team actively collaborates with our technology team under the leadership of our CTO to make sure that we can implement and get the outcomes that we want. The way that it's rolling out is probably similar to many companies. The normal ChatGPT, Copilot, Gemini, that is being rolled out systematically to people's desktops so that they can just explore and drive efficiencies in their day-to-day work.

And then two, we have a process whereby we're going through use cases that are being pushed top down or promoted bottoms up within the organization. We're then piloting those use cases. And to the extent that we see high ROI and replicability across the platform, we're pushing it. Last year, we probably looked at 160 viable use cases. We landed on about 25 that we're actively deploying now in both the front office, middle and back office. And it's everything from NDA view and negotiation, which is now almost fully automated. AML/KYC processes where we're able to take out legal and compliance resources and get better outcomes.

Sales force optimization, where we're actually using AI to help our wealth salespeople drive better sales through lead generation and some data review. Our investment teams are using AI tools to help write investment committee memos and build models. So it's pretty broad-based. Interestingly, 2025 was probably the slowest year of organic headcount growth that we've had in the last 10-plus years. And so I think that's an indication that some of these productivity initiatives are taking hold, where people are able to do more with the same headcount because of some of this productivity. And so we're still early days in that process, but I've been quite pleased with some of the early results that we're getting.

Great. So with that, we will wrap that up. But Mike, thank you so much for joining us. Really appreciate it.

Thank you, Craig. Thanks, everybody.

Welcome to Ares Management Corporation's Fourth Quarter and Year-end 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Thursday, February 5, 2026. I will now turn the call over to Greg Mason, Co-Head of Public Markets Investor Relations for Ares Management.

Good morning and thank you for joining us today for our fourth quarter and year-end 2025 conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. We also have other 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, 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 fourth quarter earnings presentation available on the Investor Resources section of our website for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. Note that we plan to file our Form 10-K later this month. This morning, we announced that we declared a 20% year-over-year increase in our first quarter 2026 common dividend of $1.35 per share on the company's Class A and nonvoting common stock.

The dividend will be paid on March 31, 2026, to shareholders of record on March 17. Jarrod will provide additional color on the drivers of this increase later in the call. Now I'll turn the call over to Mike, who will start with some fourth quarter and year-end business highlights and our outlook for 2026.

Thank you, Greg, and good morning, everybody. I hope you're doing well. Our strong fourth quarter cemented another record year for Ares. We reached several important milestones and made significant progress on our strategic initiatives by expanding our investment platform and geographic reach. We crossed $600 billion in AUM, and we exceeded $100 billion in both our 2025 fundraising and investing activities. Our record $113 billion in total fundraising for the year was capped off by a record $36 billion in the fourth quarter.

It's noteworthy that we surpassed our previous record by such a wide margin without our 2 largest private credit campaign funds in the market. This success, along with the closing of our GCP acquisition in March, resulted in AUM growth of 29% over the previous year to reach over $622 billion. We also saw a notable increase in our investment activity in the second half of the year following a brief market pause around the April tariff announcements.

Fourth quarter deployment was a record $46 billion and for the full year, gross deployment totaled $146 billion, an increase of 37% over 2024. These activities drove a 32% year-over-year increase in our FPAUM to $385 billion and new annual records in management fees, FRE and after-tax realized income per share of Class A stock, which all increased more than 20% year-over-year. And as will Jarrod discuss a little bit later, we continue to generate attractive performance across our major strategies.

In our view, these results demonstrate that our continued investment in growth and diversification is taking hold and that we have significant momentum entering 2026. It was also a year of significant strategic enhancements with new products, expanded distribution efforts and gains in internal operating efficiencies.

The acquisition of GCP expanded our real estate and digital infrastructure offerings and vaulted our real estate business into a global top 3 owner and operator of industrial real estate. The scale, expansion and diversification of our product suite also drove growth in our Wealth Management business to over $66 billion in AUM, up 69% year-over-year.

We also made significant investments in new data systems, including over 25 AI projects across the firm focused on enhancing our investment decision process, optimizing sales efforts and increasing back-office productivity, which all should ultimately assist margin growth and productivity in the years to come. And in December, we were both pleased and honored to be added to the S&P 500 Index.

As evidenced by our strong fund performance, our investment portfolios continue to exhibit solid fundamentals, and our credit portfolios generated attractive return premium over the traded market equivalents. Within credit, productivity improvements in portfolio companies are translating into solid revenue and EBITDA growth. Loan-to-value ratios are near historical lows in the 40% range.

Interest coverage continues to strengthen, and quarter-to-quarter non-accruing loan trends are generally flat while remaining well below historical average levels. As an example, in our U.S. direct lending strategy, portfolio company EBITDA growth was in the low double digits for the last 12 months and net realized loss rates were essentially 0 on a net basis, which is in line with our 20-year average of 1 basis point in annual losses. Across real assets, valuations are steady to improving.

Rent growth is constructive, market transaction activity is returning and demands for digital infrastructure are driving both data center and energy infrastructure investment opportunities. Secondaries are benefiting from a strong economic backdrop and positive fundamentals across their underlying asset classes. And within private equity, organic portfolio company EBITDA growth was 13% for the last 12 months in our latest PE fund, ACOF VI.

Over the past several years, we've invested in scaling our global origination and investment capabilities across credit, real assets and secondaries. In 2025, our investments paid off as our investment activity accelerated and broadened across products and geographic regions. We saw real asset deployment more than double from approximately $10 billion in 2024 to over $23 billion in 2025.

Deployment across all credit increased 29% and a rebound in the liquid markets, along with stronger inflows drove a 46% increase in our liquid credit deployment. After a slower first half, our U.S. and European direct lending deployment also increased sharply year-over-year with investments into more than 240 different portfolio companies. And together, these 2 strategies represented just over half of our deployment for the year.

Looking ahead, we're optimistic that the improving transaction environment from the second half of last year will segue into increased activity in 2026. We continue to see significant pent-up demand; particularly as private equity sponsors seek liquidity solutions for mature portfolios. This is supported by a large inventory of seasoned assets, open financial markets, an improving interest rate environment, greater business confidence and gradually narrowing bid-ask spreads.

Our private equity business is positioned to take advantage of a meaningful pipeline of new investments and potential realizations. As these dynamics evolve, our origination capacity plus greater market transaction volumes should lead to further growth in our deployment in 2026, barring any unforeseen global market disruptions.

And while we would normally expect lower seasonal volume in the first quarter as January and February are typically slower, our aggregate investment pipeline across the firm measured in mid-January increased from a quarter ago and now stands at a record level. As we look to 2026 and beyond, we're confident that our business is well positioned for future opportunities. We operate in vast addressable and growing markets that span tens of trillions of dollars globally.

And while we're among the largest alternative managers, we continue to view our business as being in the early stages of global expansion. Visibility into our future growth is high as we've already raised $100 billion of AUM that will earn fees once it's invested. Institutional and individual investor demand continues to be broad and persistent. Attractive private market returns, and underweighted allocations continue to drive additional inflows from both institutional and individual investors.

Supporting this, November market survey highlighted that approximately 90% of institutional investors plan to add or maintain private credit allocations over the longer term. We also continue to see strong demand from individual investors. Despite over $300 billion in private market gross inflows from the wealth channel over the past 3 years, the average allocation to private markets for individual investors remains unchanged at approximately 3% to 4%, primarily due to rising overall market values.

As a result, we believe that there are meaningful opportunities for private market allocations in the wealth channel to move towards the much higher allocations that we see among institutional investors. Turning to our fundraising results for the quarter and the year. Our institutional channel led the way as it continues to account for the majority of our fundraising. Starting with the credit group, we raised over $18 billion in the fourth quarter across all our channels with U.S. and European direct lending strategies accounting for over $12 billion.

With an opportunistic credit, our third fund raised an additional $1.2 billion in the fourth quarter, bringing total commitments to just under $7 billion at year-end. We anticipate a final close for the fund at the end of the first quarter at a level over the $7.1 billion that we raised in the previous vintage. Our liquid credit strategy raised over $3 billion in equity commitments in Q4 through several sizable new SMA mandates. In January, we launched our third closed end commingled alternative credit fund.

Given the strong initial demand, we anticipate completing the full fundraise by the end of the summer, if not sooner, at a similar level to the previous vintage of $6.6 billion. As a reminder, before launching the new fund, investors in the second vintage were offered the election to extend the investment period of the fund for 2 additional years. Approximately half of the LP base, representing $3.5 billion of commitments, in fact, elected to extend.

And with the previous fund extension, if the fundraise meets the previous vintage size, Ares will have over $10 billion of incremental investment capacity in the strategy and manage 4 of the 5 largest institutional ABF funds. For the full year, we raised more than $65 billion across our 6 strategies within the credit group. And as these results demonstrate, demand for our credit products remain robust.

Going forward, we expect to launch our fourth U.S. senior direct lending fund later this year and our seventh European direct lending fund in early 2027, representing our 2 largest closed-end commingled funds. The timing and sizing will depend on deployment pace and other fundraising activities, but for our U.S. fund, we anticipate a potential first close in the fourth quarter.

The fourth quarter capped a very strong year for our real estate group, where we raised more than $16 billion for the year, including over $7 billion in the fourth quarter. Highlights in the quarter include $4 billion raised in our real estate debt strategy and an additional $1.3 billion in our 11th U.S. value-add fund, bringing total commitments to $2.3 billion. We're already above our $2 billion target, and we anticipate hitting the fund's hard cap of $3.1 billion in the first half of 2026.

Going forward, we have a strong lineup with our fifth Japan Industrial Development Fund, the return of our fifth U.S. opportunistic fund, our second self-storage fund and new European real estate products, along with additional flows from our perpetual institutional and wealth products. In infrastructure, during the fourth quarter, we raised approximately $3 billion across our sixth infrastructure debt fund, certain SMAs and our open-end core infrastructure fund. This concluded a strong year where we raised more than $7 billion, and we expect 2026 will be even better.

Notably, inclusive of flows since year-end, our open-end core infrastructure fund now stands at over $2.5 billion of assets. Following closing of our inaugural $2.4 billion data center fundraise in 2025, we expect to raise significant additional capital around our digital infrastructure equity strategy in 2026, which has distinctive advantages due to our vertically integrated model and our significant global pipeline of seed assets, which include cloud and AI data center projects already underway.

Our digital infrastructure team and pipeline continue to grow as we source opportunities to execute through Ada Infrastructure, our in-house data center development and operations team. Although data center exposure is a relatively small component of our current AUM at just under 2%, we expect digital infrastructure to be a key contributor to our business in 2026 and beyond. In our secondaries group, we held a final close for our inaugural credit secondaries fund, raising nearly $1 billion in the fourth quarter, bringing total equity commitments to $4 billion.

This is a remarkable achievement for a first-time fund, the largest inaugural institutional fundraise for Ares. Including anticipated leverage and related vehicles, total investment capacity for our credit secondaries strategy now exceeds $7 billion. We believe that our team is well positioned as a first mover in the burgeoning credit secondaries market with substantial capital and differentiated knowledge and experience in the asset class.

Our PE secondaries team raised over $1.8 billion in equity commitments across our new GP-led secondaries products and our wealth product. And in December, we launched our 10th real estate secondaries fund and anticipate new commitments throughout 2026. For the full year, our secondaries group was a standout performer with $12.9 billion raised and an increase in AUM of 45%.

We ended the year with our secondaries business having nearly doubled in size since we acquired Landmark in mid-2021. In the wealth channel, 2025 was a transformational year with equity flows into our semi-liquid wealth products totaling $16 billion and net flows of $14 billion, which drove our AUM in our semi-liquid wealth products to $66 billion at year-end. Third-party sources indicate that we gained market share for the year, including within the direct lending and real estate sectors, which positions us as within the top tier of alternative managers in the wealth sector.

The fourth quarter was our second-best quarter ever with $4.1 billion raised across our 8 products with positive net inflows across all 8 semi-liquid solutions totaling $3 billion. Performance across our funds continues to be a meaningful differentiator with strong performance across direct lending, private equity secondaries and our real estate products, as Jarrod will highlight further.

We've specifically designed our wealth products to combine the best of what Ares offers with the evolving client needs for durable income, diversified equity growth and tax-advantaged real assets exposure. The result is that we're seeing strong demand across each of our 8 semi-liquid strategies, and we now have AUM exceeding $2 billion in 7 of our 8 strategies.

Our near-term focus is to complement our existing flagship products by extending these strategies with new distribution channels, geographic regions and expanding products with our existing 80 distribution partner platforms. In the retirement sector, we introduced our U.S. direct lending credit product to the 401(k)-market last month, and we expect to add more plan sponsors in the future.

As we look to 2026, total equity inflows in January were approximately $1.2 billion, and we expect to raise a similar amount in February. Based on industry dynamics, along with our product breadth and differentiation, performance leadership and platform scale, we expect our equity inflows for this year to meet or exceed our prior year levels. Our third distribution channel in insurance is also expanding through our dedicated insurance solutions group.

Our insurance AUM growth accelerated with strong flows from Aspida and third-party insurance clients. At Aspida, sales volumes totaled $8.8 billion for the year, a 39% increase over 2024, and we continue to see interest from third-party insurance companies as total insurance-related AUM increased 20% year-over-year to $86 billion. Going forward, we expect to further broaden our private invest-grade origination capabilities.

We have an excellent foundation with a private investment-grade business embedded within our alternative credit strategy, which manages approximately $25 billion across private IG solutions. Notably, our private IG strategy within ABF generated a return premium of approximately 200 basis points over IG corporate bonds last year.

We plan to expand our private IG capabilities beyond asset-backed investing into corporate direct lending, infrastructure debt and real estate debt through our expansive direct origination platform. We'd expect to raise more third-party insurance capital around these expansion efforts across our credit strategies over time.

When we include the significant product lineup that we have on the institutional side, including the launch of 2 of our largest credit funds, along with the momentum of our wealth and insurance platforms, we expect the strength in our fundraising to continue into 2026. At this point, we expect our total fundraising for 2026 to be as good or better than our record year in 2025. And now I'm going to turn the call over to Jarrod for his comments on our financial results and outlook. Jarrod?

Thanks, Mike. We continue to build on our strong momentum into year-end, extending the financial records we set in prior years across management fees, FRE, realized income and after-tax RI per share, each of which exhibited strong year-over-year growth. We were also able to generate a meaningful year-over-year increase in FRE margins in the fourth quarter and a modest increase for the full year even with the margin headwinds from the GCP acquisition.

We enter 2026 with a high level of optimism about the continued success and growth of our business. We're seeing improved conditions for future deployment across a broader range of investment strategies than we have in several years, and we're well prepared to invest with substantial dry powder of $156 billion. This year, we're raising our largest funds in alternative credit and U.S. direct lending and anticipate strong demand from institutional investors. The GCP acquisition integration is going well.

And in 2026, we expect to see more expense savings and revenue enhancements. And finally, 2026 is expected to be our most significant year yet for the realization of some of our European-style performance fees, which have been accruing for a number of years, and we have a meaningful opportunity for significant growth in our FRPR due to the growth in underlying fee eligible AUM and the rebound in the real estate market, which we expect to continue. Turning to our quarterly results.

Management fees were a record $994 million in the fourth quarter and totaled $3.7 billion for the full year. Management fees grew 27% and 25% on a quarterly and full year basis versus comparable periods, driven by strong growth in our FPAUM. Fourth quarter fee-related performance revenues totaled $171 million, and full year FRPR increased 30% versus the prior period as we saw increased contributions from secondaries products as well as a contribution from our diversified non-traded REIT for the first time since 2022.

As I mentioned, there is the potential for significant growth in FRPR from both of our non-traded REITs, assuming a continued recovery in the real estate market. The diversified REIT has now surpassed its high watermark, and our industrial non-traded REIT is within 2.5%. To put this in perspective, if our non-traded REITs had not faced the high watermark in 2025, the 2 REITs would have recognized $79 million in gross FRPR for the year based on their respective returns.

Fee-related earnings for the full year increased 30% over the prior period and accelerated to 33% year-over-year growth in the fourth quarter to a record $528 million. Full year FRE margins came in at 41.7%, ahead of 2024's FRE margin of 41.5%, which was in line with our guidance from last quarter's call.

Heading into 2026, we have good visibility into improving margin contributions from continuing back-office efficiencies from the GCP integration, the data center business flipping from a negative FRE business to a positive FRE contributor and our expectations for continued strong growth in AUM and fee-paying AUM. As a result, we expect the 2026 FRE margin to come in at the high end of our annual target range of 0 to 150 basis points.

Our realization activity increased in the fourth quarter with net realized performance income totaling $102 million. For the first quarter, we expect to realize $52 million this upcoming week and have visibility of approximately $50 million of additional net realized performance income from our European style funds. Therefore, we're on track with the guidance we gave on our Q3 call about generating $200 million in realized net performance income over Q4 and Q1 of 2026.

For the full year of 2026, we continue to expect our European style net realized performance income will total approximately $350 million, which would more than double 2025 levels. For the full year, we realized a record $169 million in net performance income. Even with the record realizations during the year, our net accrued performance income on an unconsolidated basis rose by approximately $102 million or 10% to $1.1 billion at year-end with approximately $984 million or 89% in European style funds.

As Mike mentioned earlier, the private equity transaction backdrop is improving. So we believe there's the potential for us to realize a modest portion of our $123 million net accrued carry balance in our American style funds, most likely in the second half of 2026. Realized income for the fourth quarter totaled a record $589 million. And for the full year, it exceeded $1.8 billion, a 26% increase from 2024.

For the full year 2025, our effective tax rate on our realized income was 10.3% and rose to 13.5% in the fourth quarter. Our tax rate was higher in the fourth quarter due to a greater amount of net realized performance income, which generally has less deductions and therefore, results in a higher effective rate. For 2026, we anticipate an effective tax rate on our realized income to be in the range of 11% to 15%. As you can see from the earnings presentation, our funds and assorted composites continue to perform very well.

For the full year, we experienced double-digit returns in our U.S. direct lending, alternative credit, opportunistic credit and APAC credit strategies. As Mike stated, credit quality underlying our U.S. and European direct lending portfolios remained strong and stable. In our U.S. direct lending portfolios, our companies generated year-over-year EBITDA growth of 10% and interest coverage improved to 2.2x.

Our non-traded BDC had 0 non-accruals across its nearly 900 portfolio companies with stable dividends throughout the year and a 9.3% net return. As of November 2025, our non-traded BDC was the #1 performer measured by comparing the 1-year return of Class I shares reported in SEC filings among the 5 largest non-traded BDC peers as identified by Stanger's AUM data.

Our public BDC, Ares Capital, also reported strong credit metrics with non-accruing loan ratio of 1.8% at cost and 1.2% at fair value, which was unchanged from the level a year ago, and this ratio remains well below its long-term average and the industry group average. Ares Capital generated a 10.3% fund level return on its NAV for 2025. Ares Capital has generated an average annual total stock return over its 21-year history of 12.4%, which is double the average annual return of the broadly syndicated bank loan index and nearly double the high-yield index over that same period.

In real estate, the recovery of many asset class values is clearly underway, and we're seeing strong performance across our funds. Notably, our diversified non-traded REIT generated an 11.6% total net return in 2025. As of November 2025, our diversified non-traded REIT was also the #1 performer among our 5 largest non-traded REIT peers as measured by the 1-year return of Class I shares reported in SEC filings and Stanger's AUM data, and our industrial non-traded REIT remains the #1 performing non-traded REIT over the past 5 years using the same metrics in peer set.

In infrastructure, our open-ended core infrastructure fund generated 9.9% net returns for the year. In private equity secondaries, our semi-liquid wealth vehicle generated a 13.4% net return for the year. And within private equity, our most recent vintage fund, ACOF VI, remains a top quartile fund in its vintage and has generated a gross IRR since inception of over 21% with a net return in 2025 of 16%.

Finally, as Greg stated earlier, we've elected to increase our first quarter dividend up to $1.35, up 20% from last year. This increase reflects our continued confidence in hitting our target of 20% plus for realized income in 2026, which is supported by strong growth fundamentals in our management fees and fee-related earnings and enhanced by accelerated growth in our net realized performance income in our European style funds. I'll now turn the call back over to Mike for his concluding remarks.

Thanks, Jarrod. Before wrapping up our prepared comments, I would love to address questions that we're getting about our software exposure given the recent market volatility. Across our firm, we have a highly diversified portfolio of investments in software companies, which are nearly all senior secured loans and represent about 6% of our total AUM and less than 9% of what we consider private credit AUM, inclusive of real asset lending, but excluding liquid credit.

Importantly, not all software exposure is the same since private equity is in the first loss position and most of our senior loans are compounding cash returns in the 10% range and are short duration, typically 3 to 4 years of remaining maturity. The traded equity and debt market indices in software reinforce this point with the public equity software index down roughly 20% year-to-date versus only 2.3% for the software index in the broadly syndicated loan market.

Our software portfolio is highly diversified across many subsectors with a very small percentage of the portfolio that we deem to have high risk of AI disruption. We lend at lower loans to value on software, which are in the high 30% range compared to mid-40s LTV on the rest of the portfolio. Our software portfolio companies generate significant cash flow with EBITDA margins over 40%, average EBITDA over $350 million and a growth rate that is faster than the overall credit portfolio over the past year.

We don't focus on ARR loans, which represent less than 1% of our global direct lending portfolio and non-accruals in software are close to 0. As a balance sheet-light manager, we have negligible look-through exposure to software on our balance sheet and any potential credit losses would also have a limited impact on management fees and earnings. In fact, any time there's a material disruption in any industry, there's always 2 sides of the coin.

Our opportunistic credit and secondaries business should see more investment opportunities, which provides a natural hedge. And an acceleration in AI adoption should actually be a meaningful contributor to management fee and earnings growth overall for Ares as our digital infrastructure business would generate meaningful AUM, management fees and FRE growth. As a result, we see no change to our earnings growth outlook from AI risks in our existing portfolio and our business can naturally adapt to the risks and opportunities as they're presented.

So in our view, we enter 2026 in a position of strength with strong underlying performance across the portfolio, an improving capital markets and M&A backdrop, a large and expanding footprint of origination capabilities across asset classes and geographies and a significant amount of dry powder to take advantage of the many investment opportunities that we're evaluating in the market.

As Jarrod mentioned, we have a number of earnings tailwinds, including our significant AUM not yet paying fees, our prospects for margin improvement, revenue and expense synergies from the GCP integration and our potential growth in performance income and FRPR. We believe our business is well prepared to navigate any challenges arising in the markets, including AI software-related risks.

And while we have seen some credit dispersion among the peer group, we're seeing strong fundamentals across our credit portfolios. As I stated earlier, the fundamentals are actually improving with loan-to-value ratios and non-accruals near historic lows, leverage multiples declining, interest coverage multiples increasing and growth intact. We have large and experienced teams across each of our businesses.

And within our credit group, we believe that we possess the largest portfolio monitoring and restructuring teams in the industry. As you heard me emphasize before, our balance sheet-light management fee-centric business model insulates the impact from credit losses to our earnings and our ample dry powder allows us to invest opportunistically during periods of market dislocation and grow at a time when many capital markets participants are forced to pull back.

I'm so proud and grateful for the hard work and dedication of our employees around the globe, delivering yet another year of record results. And I'm also deeply appreciative of our investors' continuing support for our company. And with that, operator, could you please open the line for questions?

[Operator Instructions] Our first question comes from Craig Siegenthaler with Bank of America.

I wanted to start where you left off on the software AI disruption theme, and I really appreciate the additional commentary at the end of the call. But if you look over the last like 5 years or so, software was a large source of credit origination for the industry. And we've seen a transition to data centers and power, really the picks and shovels around AI, which is benefiting other parts of your business.

But as you take a step back, how do you see your overall deployment effort impacting from a lack of potential business from the software industry in the future, but the shift to areas like data centers and power, which fuel the growth of AI.

Yes, thanks, Craig. It's -- I appreciate the question. And again, hopefully, the prepared remarks gave some color, but I also think my partner, Kort, did a great job on the ARCC call yesterday, just articulating the approach that we have to software investing and frankly, investing in general. Obviously, we've been doing this for 30 years. And one would expect, but maybe not that the first question one would ask when investing in software is, do I have technology or obsolescence risk.

So it would be pretty unlikely that someone who is investing in software has not been underwriting with a primary view as to whether or not there's a risk of disruption. So again, we feel very, very confident that we have our arms around our existing exposures. We feel very confident that the types of software businesses that we've invested in have meaningful characteristics that will protect them and if not create opportunity, companies that are part of foundational infrastructure.

They sit at the center of companies' tech stacks. They manage complex workflows. They benefit from ownership and collection of proprietary data that they've built over many years with diverse customer bases. They operate in highly regulated industries like health care and financial services.

So again, I -- it is interesting to see how the markets are thinking about software companies as all being equal and not really understanding the difference between companies that could get disrupted by AI in places like digital content creation or data analytics and visualization versus like real entrenched enterprise systems. And so we'll just keep talking about the exposures and hope people will get it. In terms of the origination, I think the easier way to think about it, Craig, is over a 30-year period, new markets open and close.

And the best way to think about what we do is we're just trying to capture our broad slice of GDP and economic growth around the world, obviously, maintaining a high degree of industry and company selectivity. So as software and health care continue to grow into meaningful contributors to GDP, not surprisingly, we and others followed with the same level of underwriting discipline that we always have had.

And now that we're moving into a super cycle on infrastructure and energy, we're following there. So I don't perceive that this disruption is going to have a meaningful impact in any way on aggregate origination volumes. And as we said in the prepared remarks, our pipeline across the entirety of what we do is up at record levels right now. So yes, we're feeling pretty good about it.

We'll now move on to Alex Blostein with Goldman Sachs.

I was hoping to piggyback on your comments, Mike, around what you're seeing in the wealth channel kind of real time. Obviously, not the first time we're going through volatile periods. We know the retail channel tends to pull back a little bit. I think you've said that what you've seen so far resembles kind of your January flows. I think you said $1.2 billion across the suite of products.

So can you unpack that a little more between direct lending products versus other wealth vehicles that you guys have, sort of what you're seeing for Feb 1? And I guess, more importantly, just the sentiment on the ground from distributors and gatekeepers and how they view direct lending wealth products in the current backdrop?

Sure. I'll try to give you a deep answer on that. But before I do, Alex, I just want to remind folks back to how we've tried to position our fund families and capital base, right? We were, frankly, a little bit slow to grow and deepen our penetration in wealth because it's a little bit more procyclical and frankly, harder to manage flows against the deployment opportunity.

And so it was critically important to us that we looked at wealth, yes, as an opportunity to open up access to retail investors who previously couldn't get to this product. But from a fund management standpoint, it was critical that we felt that we had a real deep base of institutional drawdown capital in the form of commingled funds and SMAs that sat alongside these products to make sure that we can navigate the flows.

And I think where people have tripped up is they've been, frankly, a little too dependent and over-indexed to the wealth flows, and they've been procyclical when the money is coming in and either unable to defend or unable to capture the highest quality vintages.

So we've been very, very intentional and measured about how we're thinking about the product set, how we're thinking about the pace of growth in wealth relative to our institutional client flows and making sure that if we find ourselves in a period where there are headwinds on flows in wealth that it doesn't do anything to diminish our ability to take advantage of the market.

And that is actually where we sit here today. We had record flows last year, as we mentioned, about $16.5 billion of equity and close to $25 billion of total flows into wealth. That was a 61% increase year-over-year. We have seen some cyclicality in how the wealth channel is look at different asset classes. Obviously, we saw a big ramp-up in real estate exposures 3 or 4 years ago. And then we saw some headwinds there. Some of our peers obviously saw meaningful net outflows.

If you look at our experience in real estate, we actually enjoyed net inflows even through the period of dislocation in real estate. And now with some of this, in my opinion, overblown noise around private credit, you are seeing some outflows. But on a net basis, the inflows are still quite strong. And what we're hearing on the ground from advisers, and you could see this just in the investor count looking to take advantage of the liquidity opportunity, about 95% plus of all the investors are not looking for liquidity.

So typically, what's driving these redemption queues are a small handful of investors that then have to continue to get back in the queue to the extent that they don't get the liquidity they need. So you do tend to see overinflated numbers coming through the redemption queue as people are trying to get to the front of the line. In January, we saw very strong flows, as you said, $1.2 billion. We're seeing similar numbers coming in line through February. The demand is broad-based. We're seeing good flows in the private credit product, good flows in the core infrastructure product.

And that's been a big bright spot for us in ACI, as an example, we saw $750 million of inflows, I think, in January and February versus about $200 million last year. So good momentum. I think from the Ares perspective, and it's important, that's why I started the answer where I did, Alex, that if we do see a modest slowdown, which we're not calling for, but if we do, it's not going to do anything to impact our ability to continue to drive FPAUM and FRE through the deployment in the other products that we manage.

We'll now move on to Bill Katz with TD...

So I appreciate all the comments and also the work on the ARCC side, which we listened into as well. So maybe a bigger picture question for you, Mike. As you think ahead, last couple of years have been defined by private credit in the retail side, and you talked about sort of the real estate cycle prior to that. When you look at the data, it does seem like that's starting to slow. I was curious your thoughts on 2 areas that we think could be a really big opportunity just given the shifting macro backdrop, real assets, specifically real estate.

And then the secondary is platform is just another form of liquidity. And then I think you mentioned that your flagship credit vehicles might be back in the market. I just missed the timelines of that. Could you just sort of refresh what you said, I apologize, busy morning. And how big could those be relative to the prior sizes?

Yes, so when we think about our large credit funds, our opportunistic credit fund, our third one, we said has been having rolling closings. We expect to have a final close on that fund early this year and it will be at or above the prior vintage of $7.1 billion. We also mentioned in the prepared remarks, Bill, that we have launched the third vintage of our "flagship ABF fund, Pathfinder." We expect that, that will likely be wrapped up by the end of the summer, if not sooner, has really good momentum.

And again, the expectation there would be that we would have a closing on that fund at or above the prior vintage, which was $6.6 billion. And that's on top of having extended duration on about $3.5 billion of investor capital from the prior fund. So net $10 billion effective pool of capital increase there.

We are likely to be bringing our fourth U.S. direct lending flagship back to the market this year and expect that we could have a close as early as the fourth quarter of this year. And then we will be bringing our seventh European direct lending fund into the market and would likely have a close probably early in 2027.

So all of those are starting to work their way through. I think in terms of -- you highlighted real assets and secondaries, and I appreciate you doing that because I think one of the things that we've been very focused on here as we build our capabilities and capacity over the last 10 years has been to diversify by asset class and geography and try to identify where there's going to be breakout growth and where we can accumulate scale and talent and capital to go after it.

Secondaries being one place where we mentioned on the prepared remarks, we acquired Landmark 4.5 years ago with a view that we were going to see transformational changes in secondaries that were going to be driven by a move to GP-led, continued growth in primary market exposures, diversification away from just PE into places like real assets and credit.

And as we said, we've doubled the AUM and profitability of that business here over the last 4.5 years, and the momentum continues. Real estate as well, obviously, you've seen us making meaningful investments in vertically integrating and developing the capability set there. And real estate is in a very interesting cyclical place, having seen real estate values draw down 18% to 20%.

And now you have markets that have been undersupplied where we saw construction down over the last couple of years, a constructive rate backdrop and some secular tailwinds now in certain parts of the market like logistics that have us pretty excited about the deployment and return opportunity in the real estate complex. So I want to emphasize, which I think was the point of your question, Bill, that there may be a misperception that we're kind of over reliant on private credit deployment and fundraising.

And while that obviously continues to be a big part of the business, we have 19 to 20 global credit strategies that are driving deployment. And when one is turned on, sometimes others are turned off. But because of the diversity of strategy, I think you're going to see continued deployment pretty much across the platform. But I would expect to see continued breakout growth in real estate and secondaries or real assets and secondaries, for sure.

We'll now move on to Ken Worthington with JPMorgan.

I wanted to flesh out the comments in your prepared remarks on ABF and really the outlook for fundraising and deployment as we think about 2026. So it seems like the episodic or periodic credit quality fears that we're seeing in direct lending back half of '25 and early '26 might be focusing more demand on alt credit and ABF. I'll break it down in 2 parts. You mentioned the $25 billion on the rated side. Would you expect interest there to be improving? And as we think about Pathfinder and Pathfinder core, how is the deployment opportunities on that side of the business?

Sure. Thanks, Ken. Again, I just want to table set here. When we think about the ABF business, there's a huge addressable TAM globally, but people are articulating the opportunity in different ways because there is a high-grade rated ABF market, and then there is a sub-investment grade and non-rated that work hand-in-hand, but require, in my opinion, different skill sets, different forms of capital, different networks, et cetera.

So where we have been laying groundwork building capability and capacity since we acquired Indicus 15 years ago was to really focus on being the largest, broadest investor on the non-rated side because we felt like that's where we're going to be able to generate the highest return premium and generate the most alpha in the market. And with that capability set now very well entrenched here, we've been moving up the capital stack into the high grade of the market to the point now when you look at the business, it's roughly 50-50 kind of bottom of the stack, top of the stack.

And I think that positions us well to meet the needs of our institutional clients on the non-rated side with the types of returns that you see we can generate and then also to continue to feed the demand for the rated product into our affiliated insurer, Aspida and our third-party insurance clients. Maybe back to the credit quality point, and I want to hit it again because there's so many kind of false narratives out there.

When you look at where we have positioned our ABF book historically, #1, we have 0 exposure to e-commerce aggregators. #2, we have de minimis exposure to subprime consumer. It's less than 1% of what we do. We have de minimis exposure to auto. It's about 1%, and it's all prime. So back to kind of underwriting standards, as these markets are growing, we have seen people moving into segments of the market, trade finance where we just never tread.

There are probably 25 subsectors that we cover within the broad waterfront of ABF, and there's plenty of attractive deployment opportunity to go around. We're spending a healthy amount of time still around digital infrastructure, partnering with our bank and insurance clients around all the various forms of fund finance. And as we said in the prepared remarks, the growth in deployment on both the rated and non-rated side has been pretty significant, and I'd expect that to continue.

I think you will continue to see consolidation play out in this market similar to the ways that you saw it play out in kind of the core corporate direct lending market because the benefits of scale are actually big drivers of return here. A lot of these deals are $1 billion-plus transactions. They require a significant capital base in order to drive diversification, and they require a pretty unique set of skills to understand how to underwrite the underlying. So it has been one of our fastest-growing businesses here.

I think it will continue to be one of our fastest-growing businesses here. And I think the deployment is going to probably still look 50-50 when all is said and done. But remember, $1 of deployment on the Pathfinder side of the house is worth significantly more profit dollars to Ares and $1 of deployment on the rated side, and we think that's important for people to understand.

We'll move on now to Brennan Hawken with BMO.

I had one sort of ticky-tacky question and then one sort of longer-term perspective. So on the ticky-tacky side, the catch-up fees in secondaries, it looked like the full year was less than what we've seen year-to-date. So was there actually negative catch-up fees in the fourth quarter? Or was just the prior quarters revised down? And then I appreciate that the wealth management channel is a smaller source of fundraising for you. But what does your wealth management AUM look like across like major geographic regions, particularly interested in the portion of AUM from Asian investors.

Brennan, it's Jarrod. Thanks for the question. I'll take that first part there, the ticky-tack one. It's just because the secondaries fund, which is our third infrastructure secondaries fund had a close in the third quarter that had the first 3 quarters of it. So as you get to the fourth quarter, there's amounts that were in that catch-up in the third quarter that pertain to this year.

So when you look at it for a full year, you have the full year run rate. So that's why the number operates in that manner is because when you have a full year, it's already catching all of those. There's no technical catch-up, but there is for a particular quarter within the year. So that's the difference that you're seeing there.

Yes, I think with regard to wealth, it's a good question because we have seen in some of the prior periods of outflow that you've had Asian investors who have been buying the semi-liquid product on leverage begin to look for liquidity, at least we saw that on the real estate side. I don't know exactly the in-force book in Asia Pacific, but maybe just to frame it, one of the things that has differentiated us on the wealth side is the way that we've built out our European and rest of world distribution.

Over the last 2 years, a little over 30% of our capital gathered has been outside of the U.S., which we think is quite unique. I think it's been challenging for some of our peers to get that type of penetration and growth. When I look at where that 30% rest of world is coming from, it is mostly non-APAC and we're seeing probably most of our APAC flows in the Australia and New Zealand market versus rest of developed Asia.

We've had some early successes in the Japanese market that I would expect to continue. So I'm just making a guesstimate based on what I know the inflows have been, I would venture to say it's a single-digit type exposure to the APAC region and pretty diversified by geography.

We'll move on to Brian Mckenna with Citizens.

So on the ARCC call yesterday, the team talked about the acceleration in activity and deal flow in the non-sponsor channel. What is the incremental opportunity in this channel today from a deployment perspective? Any specifics you can share on the size of the pipeline today versus a year ago? And then I suspect spreads have been more resilient in this part of the market. So how should we think about spreads here versus sponsor-backed deals? And then how that is impacting overall spreads and all-in yields for your direct lending strategies?

Yes. Mitch is here from -- who runs our credit group. I'll let him take that one, and I can provide any additional color.

Yes, it's a good question. As we've talked about over the last couple of years in our U.S. direct lending and now increasingly in our European direct lending business, we've invested heavily in non-sponsor origination in a number of industries, health care, consumer, financial services, infrastructure debt, et cetera, et cetera. There are about 6 or 7 industries. And historically, it's been probably 10% of our originations.

And every time we think it's growing; our sponsor business continues to outpace it. We continue to invest it. We're going to be adding people. But you should expect 10% ongoing. And then hopefully, in the next 3 to 5 years, we're hoping to get it to 15-plus percent of our gross originations in the United States.

In terms of the spread, I think we've always had a historic view here that you should generally get paid more for the non-sponsor business just because it comes with a different set of risks in terms of counterparty liquidity and ability to support growth and ultimately institutionalize the exit. And generally speaking, I think that, that is true. There are going to be certain pockets of the non-sponsored business around places like sports, media and entertainment that may buck that historical view.

But I'd say, generally, we would agree with you that we're going to be generating modestly higher spreads. And when we're down the capital stack on junior debt and equity that there's an expectation of higher return just given that you're not facing off with a well-capitalized institutional sponsor.

Yes, and it's not just spreads. Typically, our non-sponsored businesses is a family office, a small public company, an entrepreneur, they tend to be less aggressive in leverage. So not only are you getting more spreads, but it is at lower leverage, i.e., less risk and your documentation is a lot better. So there are a lot of different reasons why we like the non-sponsor business. Fortunately or unfortunately, given our presence in the industry, our sponsor business continues to grow at pace and adds a lot of assets to our book globally.

We'll move on to Brendan (sic) [ Ben ] Budish with Barclays.

This is Ben from Barclays. Maybe a quick 2-parter on performance fees. Just first, wondering if you could give any color on FRPR for the year. I know you talked about a potential ramp coming from the REITs. I'm just curious, though, I know there's a lot of like open-ended credit vehicles that crystallize periodically. So anything you can share to help us think about that?

And then in terms of your net accrued performance income, it looks like the private equity business saw a bit of a decline just sequentially. Curious if there's anything there to call out. It sounds like you're optimistic that if markets are constructive, you could see more American style realizations in the back half of the year. So just wondering if there's anything else going on there to be aware of.

Jarrod, do you want to take that?

Yes, I got it. Good to hear from you, Ben. On the first part of your question on FRPR, and I tried to walk through in my prepared remarks there. Always tough to say with what inflows will be and then what returns will be, what the contribution could be from the REITs. But as I walked through, I kind of gave an example of how it would have looked this year.

And you can certainly see within those filings that happen on a quarterly basis, while we don't record balances at the management company level, you can see within their filings on a quarterly basis, what amounts are ticking towards accrual. So we're obviously hopeful to see those return as we've crossed the high watermark in AREIT and AIREIT is just within spitting distance. The credit side of that equation, as you asked, it's really driven by 2 things.

It's the incentive generating pool which continues to increase as we raise new SMAs, and it's what credit spreads do for any given period. You did note that we do have some that crystallize on rolling 3 years. We did have that a year ago. So we're in the second year of that roll. I would expect we're probably another year out from that. So really, the big drivers this year, credit will be that incentive generating AUM and credit spreads during the year as well as what interest rates do.

I think we're really well positioned there. So you'll continue to see FRPR increasing over that time period. And then certainly, PMF, which is our non-traded secondaries fund, that continues to grow. And as it grows, it generates more FRPR for the platform. So we're really seeing it from multiple fronts this year, not just credit, not just real estate, but really across the board and across the platform.

The AUM that we have in credit, for example, that grew 16% just from the SMA raises and other types of raises. On the private equity side, we have a liquid name in that portfolio that bounces around a little bit with some volatility. So you see that move in and out of the accrued carry period-over-period. So it's really driven by that fair value and some of the moves. I think in general; the portfolio is relatively in line.

I walked through how ACOF VI is performing, and that's beginning to become the lion's share of that carry with the older vintages monetizing a little bit as we've gone through it. So I think we're really well positioned there, but there's always going to be a little bit of noise because of the publicly traded nature of one of those holdings.

We'll move on now to Mike Brown with UBS.

I just wanted to ask on private equity. So Mike, in a recent interview with the FT, the idea of getting bigger in private equity came up as part of that interview. And it sounds like an acquisition was something that could be considered to get scale there. So can you maybe just unpack that comment a little bit and just spend a minute talking about how you would think about the kind of strategic benefits of being bigger in PE, what that could mean to the platform? And then how do you assess the right fit for Ares in terms of style and size, either AUM or relative to Ares total $600 billion of AUM?

Sure. I appreciate the question. And as was reported in that article, no deal is imminent, and it was really a conversation just about our history of inorganic growth and how we think about it, and this is really no different. We have a very simple framework, which is we want to see cultural accretion and cultural fit. We want to see strategic accretion where we can make the acquiree stronger, bigger, faster and they bring something to the table that we don't have.

And then obviously, we want to see meaningful financial accretion, which I think we've demonstrated handily in places like wealth and real estate and secondaries, et cetera. The argument for getting bigger in PE is, #1, given the size of our global business and how deep we are with the largest allocators, it's an asset class that people want to be invested in.

Obviously, we've been in the business for 20-plus years with our own strong track record, but we're not keeping up the growth pace that we are with the rest of the business. And so we feel like we can continue to serve the demands of our client base without over-indexing to private equity. Two, I do think it's important when we talk about capability that you continue to nurture the skill set that comes with equity ownership and value creation within equity portfolios.

And the larger that we get there, the deeper that capability set becomes and the more we can leverage that capability set across the platform. And so to the extent that we were bigger in private equity, we would be able to obviously begin to add value in other parts of the business-like direct lending or our minority stakes business, et cetera, et cetera. Three, comes with a different set of management and Board relationships and operating advisers that we think could be additive to other parts of the business.

Fifth, it is a very relevant business for our counterparties on the Street in terms of generating leveraged finance business and advisory business. Obviously, one of the things that comes with our diversification of scale is that we get to leverage our relationships with the Street for deal flow and execution. And if we were bigger in private equity, that would give us another arrow in the quiver to lean into those relationships in a differentiated way.

And then lastly, and maybe most importantly is as the world continues to move and consolidate, I think that you're going to see the bigger players in private equity get bigger and I think as the world of defined contribution and wealth open up to increased private equity exposure, the only way, in my opinion, that you can really deliver direct exposure away from secondaries if you have a large enough platform to generate a diverse enough book to actually deliver the right outcome to the end client.

And so as we're beginning to see the structural changes happening around 401(k) and wealth, there's a really strong argument that accumulating scale to drive diversity to sit next to our large secondaries business will create a really differentiated product. In terms of financial accretion, I think this is important. Private equity is not a growth business. My colleagues here have heard me say that. That is neither good nor bad.

It's just you're not supposed to be driving growth in that business the way that you are in other parts of the firm around real assets and credit. When it does grow, it grows episodically, but it's very difficult to get it to grow linearly at 20% plus the way that we do in other parts of the business. And so that growth differential absolutely needs to get reflected in what we're willing to pay to acquire scale and capability in private equity.

And then obviously, as we continue to focus on a real management fee FRE-centric business, we also have to be thoughtful about the way performance fees roll in from growth in private equity relative to where we are today. So there is a financial component to this that has to check a lot of boxes in order for us to get excited about it.

We'll move on now to Michael Cyprys with Morgan Stanley.

Just want to circle back to some of the commentary on the software exposure. So I heard software about 9% of private credit AUM. I'm just curious on how that looks across the direct lending book. And then if you could just maybe elaborate a little bit on how the software credits are performing, what trends you're seeing there? And when we think about your underwriting discipline that you spoke to, curious what portion of software deals you passed on and avoided over the last couple of years, last 5 years or so versus ones you participated in?

Yes, I appreciate that question. I gave a lot of that. I'll try to specifically answer. If you look at direct lending specifically, it's probably 12% of direct lending against 8.7% of private credit. I don't have an answer for how much we passed on, but what I can tell you over the 30 years we've been doing this, are yes rate ranges between 3% and 5% generally across the entire portfolio, meaning we're saying no 95% to 97% of the time. I think it's one of the reasons why we're able to generate the low loss rates that we do.

I would imagine just having sat around the investment committee table that the selectivity rate on software would be no different than within that range. One way to also think about it, Mike, I mentioned was kind of the almost near avoidance of ARR exposures at a time when people were ramping up that category. And if you were to look at the way that we've approached that part of the business, I said it's less than 1% of the exposure. So that was part of the underwriting funnel.

I will now turn the call back to Mr. Arougheti for closing remarks.

I don't have any. I appreciate everybody spending so much time with us, and I look forward to talking again next quarter. Thank you.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available through March 5, 2026, to domestic callers by dialing 1 (800) 723-5154 and to international callers by dialing 1 (402) 220-2661. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.

Great. Well, good morning, everybody. We'll get started with our next session. I'd like to welcome Mike Arougheti, CEO of Ares Management, a leading global alternative asset manager with about $600 billion in assets under management and deep expertise in credit, real asset, secondaries and private equity.

Over the course of 2025, Ares sustained its industry-leading growth momentum, supported by record pace of fundraising, accelerating deployment and strong investment performance, the nice S&P 500 ad just a day ago. So it was a great way to wrap up the year.

Yes. It's a good way to start the week.

So a good way to start the week. Thank you for being here. Really appreciate your time here.

Good to be here. Thanks.

No shortage of topics to discuss, so we'll jump right in. Perhaps not surprisingly, I'd like to start with private credit. As we all know, the market has been a bit anxious about this for quite some time. It feels like investors are trying to move away from the issue a little bit, and I'm not sure whether it's just time away from some of the headlines or something else that's driving this. But what is your assessment of where we are in terms of private credit there?

Yes. I think they moved away from it because there was -- they're there, right? And I think the industry did a good job of putting out good fundamental information just to support the strength of the asset class and the quality of credit. There's something about private credit just in terms of the way that it's grown and the way that it's become investable that I think it's getting a lot more airtime than maybe it deserves. But as long as I've been doing this, which is 30 years now, there's been a view that has not proved out that there's risk in private credit that somehow we need to be worried about.

If you look at the Ares credit portfolios, they are large, highly diversified, deleveraging. Our nonaccrual rates are near historic lows. Our company level cash flow is growing 10% to 12% consistently per annum. Interest coverage is now well over 2x and improving as rates are coming down.

If you look at bank charge-offs, they're at 60 basis points and flat to down. If you look at credit card delinquencies and the strength of the consumer, flat to down. So there's just no evidence to support it, and I think that's probably why it's moved on. In terms of the strength of the market, we talked about our pipelines in October at or near record levels, that's now pushing through deployment in Q4 is strong, and I expect to see it continue.

Great. One of the interesting recent developments and maybe coincidental with all the kind of headlines has been the Bank of England looking to do, I guess, a stress test in private markets. It feels like private credit in particular, you and many other large alternative asset managers are volunteering into that, which, frankly, from my perspective, I think, is actually really helpful. But how do you think that's likely to play out? What do you think we're going to learn? And what are the chances we'll see something similar in the U.S.?

I think what you -- it's interesting. I think what you're going to learn is that private credit has become a very important component of the capital markets. It's interesting. If you look at the leveraged finance markets over the last 10 years and includes C&I loans at banks, loans, bonds and private credit. It's been roughly flat in and around 20% to 23%, and private credit has taken share from the other entrance parts of the market.

So there's no indication that credit is being extended to noncreditworthy borrowers or assets, but there are structural shifts happening in the market. So I think as we do some of these stress tests and the research comes out, I think what you're going to find is that private credit because of the low leverage in the asset itself and the way that it's structured relative to banks, insurance companies and the securitization market, it's actually had a stabilizing effect on both the markets and the middle market economy.

So we're all for the work that's getting done. I think it's going to be a real positive for the industry. And I think transparency is always a good thing.

Great. All right. Let's talk a little bit about the fundraising dynamics. You guys are on track for, I believe, a record year, over $90 billion, and that's without your largest direct lending strategies in the market this year. Couple of questions there. I guess, one, how, if at all, are all these headlines impacting institutional LP appetite for all things private credit, not just direct lending but more broadly? And then you talk to us a little bit how you're expecting 2026 to shape up in terms of fundraising?

Yes, we've had a great year. It's been broad and diversified. So it's been institutional and wealth, our SMA and open-ended fund business continues to grow. CLOs have actually opened back up at certain times this year. So it's been a nice diversified broad-based fundraising year.

And as you pointed out, over 30 funds in the market without a lot of our large campaign private credit funds, I think we did about $105 billion trailing 12 months last quarter. And so that's a pretty good pace against our record year of $93 billion. We're going to end the year really strong here.

Going into 2026, we're not seeing any slowdown in demand from the institutional community for private credit. It's been consistent, if not accelerating. And in the wealth channel, I think there was some anxiety back to your earlier question that we were going to see a slowdown in flows. We haven't really seen material slowdown in flows, our peers haven't either. So I think that the markets are powering through.

2026 should shape up to be another strong year off of the base that we set in '25. We will begin to see some of our larger flagship private credit funds come into the market. Our ABF funds will be coming back. And on the back end of the year, I'd expect that some of our larger U.S. loan funds will be coming back into the market. So I think we'll continue to accelerate.

Yes. Let's talk about ABF is actually my next question, but really broaden this out to alternative credit platform, the way you guys sort of frame it. Spend a little bit just discussing the opportunities for Ares in this part of the market, both on IG private credit as well as nonrated ABF strategies. I think most of your peers focus more on the IG piece, why nonrated? Why is it interesting? Who's looking at this? What is the LP based kind of shipping out to be there?

Yes. It's nice to follow market because I think it gives a pretty good view of how the market is structured and growing. We've been in the ABF business before people were talking about it. We launched that business in earnest at the end of 2005 and have always been focused on what we would call the alpha generative part of the market.

For those who have been following, we've raised 3 of the 4 largest ABF funds. And my expectation is, as we launch our next vintage, that will have us, having raised and managed for the 5 largest ABF funds. The reason we focus on the bottom end of the market, and then I'll come to the nonrated piece, and then I'll come back to the IG is I think it's just highly differentiated in terms of the outcomes that we can deliver to our investors.

It is much less rate oriented, and it's more credit-oriented, which I think is what Ares is best known for and what the investors seek us out for. And it's actually just infinitely more profitable. So if you were to look at how we get paid on nonrated portfolios relative to rated, it's about an 8:1 multiplier.

So it's great to throw around hundreds of billions of dollars of IG as headline AUM, but you have to raise 8x as much in that market to generate the same revenue dollars. And so we've tried to stay balanced.

About 50% of our ABF business is, in fact, rated IG, and the other 50% is nonrated. I think the 2 have to work together. You do get some sourcing benefit by having the rated piece. There are certain times in the market where you'd rather be a lender to a portfolio, which will move you up the capital stack, and there are certain times in the market where you want to move down and own the asset.

And so part of the relative value skill set that we have is knowing where we are in the market in different asset classes and market segments to make that decision. So I don't think you want to be exclusively one or the other. We've just found -- we think it's a much differentiated proposition for the investors to be on the non-rated side.

Interesting. Let's talk a little bit about deployment. You mentioned in your earlier comment that Q4 is off to a good start. You guys are seeing an increased amount of activity. I think broadly, Ares is sitting just an enormous amount of dry powder in private credit. And when people think about deployment, I think for the most part, folks talk about M&A-related deployment and kind of more the direct lending part of the business.

So talk to us a little bit of what you're seeing in both sort of the more "traditional" direct lending deployment outlook as sponsors sort of come back to market, but also what opportunities in the nondirect lending space are you seeing in the market today?

Yes. Look, the traditional direct lending business is a very large mature market. And so people appropriately focus on it. But I'm glad you asked because when we talk about private credit, we have to remind people, it's not just corporate direct lending, it's asset-backed and asset-based finance, it's infrastructure lending, it's real estate credit and all things in between opportunistic, structured loans and bonds.

In terms of deployment, Q3 was a fantastic quarter of deployment. We put out a little over $40 billion in the quarter. We had talked about momentum coming into Q4 just given the rate backdrop, the economic environment, the energy around less regulation, and that's playing through. So as I mentioned earlier, I would expect Q4 deployment to be quite strong. And my sense is that, that will roll into the earlier part of the year as well. And it's also very broad-based, which is also a good indicator of the health on the markets.

We don't have one segment that is disproportionately driving the deployment. So we're seeing really strong opportunities in the ABF part of the business. Opportunistic credit continues to deploy well taking advantage of some of the liquidity that exists in the equity market right now and the need for DPI. Our infrastructure credit business, very, very busy just given strong growth in demand drivers in digital infra, real estate credit, real estate is having an inflection right now, and we're seeing strong demand there. So it's been very broad-based.

Yes. That's great. Let's shift gears. I'm hoping to spend the next couple of minutes on the wealth channel. It's been obviously a very important source of growth for you as well as for many of your peers for the industry broadly. A couple of months ago, you guys said you target there, $125 billion in wealth-related AUM by 2028. I think previously, it was about $100 billion. And you have real kind of tangible evidence to support that flow, so have been really good, kind of running at about $4 billion quarterly inflow base. Talk just a little bit about how you expect that to evolve over the next 12 to 18 months? How are you thinking about sort of the product evolution within your wealth offering? So any color on that would be helpful.

Yes. Look, the momentum in wealth is -- it's very strong. It's a combination of just demand coming from the adviser and investor community. It's coming from the maturation of the market and it's coming from the significant investments that we've made in product innovation, distribution, servicing and adviser education.

We have 8 semi-liquid products that we sell through the wealth channel. Each of them is scaled and diversifying its distribution. We think it offers the best of Ares institutional quality access to real assets, credit and equity. And the momentum, as you highlighted, is consistent, and we're seeing good linear growth as we're broadening out our distribution partners around the globe. I think the product set will continue to grow. We see demand in other pockets of the globe for geography-specific funds.

We've opened up 2 new funds recently. One in core infrastructure and the other in sports, media and entertainment that are having some very, very good initial flows. So we'll be rounding out the product set. But I think those core 8, as you highlighted, are already setting us up to hit that guidance just by broadening out our partner relationships in the channel.

Great. I do want to zone in on direct lending part of that offering, partially because it's just been such a big driver for industry flows. It was a really easy product, I think, for advisers in the market to generally understand. It offered obviously really good returns. Part of that is coming down just because rates are coming down and spreads are really tight and then you kind of have the recent headlines.

How do you think that's impacting financial adviser demand for nontraded BDCs in particular? And more importantly, when it comes to Ares' products, both the U.S. version AESIF and the European version, how are they differentiated maybe relative to some of the others in the space?

There's a couple of questions in there. So I think you have to appreciate the adviser is not just focused on private credit. It's a much more sophisticated portfolio construction, which is why what we try to do is say, think about durable yields that can come from traditional private credit. It can come from infra, it can come from real estate, but I think they're focusing predominantly on durable income and yield because a lot of this is for retirement consumption.

They're thinking about differentiated equity exposure where they can access large parts of the global economy in private markets and get exposures that they can't get in the public markets. And they're looking for various tax-advantaged access points to parts of the real asset market and things like our 1031 exchange product or our core infrastructure products. So it's a much more sophisticated portfolio construction than I think maybe people appreciate. Private credit is obviously a meaningful component because it has proven to be a very durable generator of income for people, but it's not the only thing that people consume.

And we have seen flows shift. So if you go 3 years ago, you had more growth in real estate than you had in private credit. Real estate flow slowed, private credit increased, if private credit stabilizes, you may see -- I don't expect that when you look at the market generally, that we're going to see a slowdown in flows, but you may see a different mix.

I think the adviser community, similar to the institutional community doesn't think about private credit as an absolute yield product. They always buy it as an incremental return to whatever the liquid alternative is. So ironically, and we've seen this in the institutional business over 25 years. When rates are coming down or rates are going up, the demand for private credit is not necessarily impacted.

The demand for private credit is driven by the fact that we've demonstrated that we can generate 150 to 300 basis points of excess return. And if you think about it from the adviser perspective, owned in a semi liquid form compounding over 10, 20 years for their clients, that is a meaningful driver of wealth creation. And so the key for us is we have to stay laser-focused on delivering the excess return, and that's what drives the demand.

And as I sit here today, we're still doing that, and I'm confident that we will.

Yes, that makes sense. One of the key features of your guys' growth has been actually outside the U.S., I think about 40% of your wealth products are coming from outside. Can you frame maybe some of the key difference between U.S. and non-U.S. distribution landscape for old products? It feels like both markets are fairly immature, but maybe Europe is even or non-U.S. is even further behind that. But how do you think the competitive set kind of evolve and differentiate between the 2 markets?

Yes, you asked me that in your prior question, I didn't get to it. But we are differentiated in the product because of the geographic access points that we give through things like AESIF, which is our European direct lending product, and we're differentiated in the breadth of the distribution.

So about 40%, as you said, of our distribution is coming from Europe and Asia Pacific, which is quite unique in this market. That's a reflection of the investments we've made in sales and servicing in those markets and the relationships that we have there. And it's also just a reflection of the fact that we have leading credit franchises in the European and Asia Pacific markets that has kind of given us a leg up on scale and brand that I think our peers don't have.

The market structure is quite different. In the U.S., it's dominated by the large wirehouse platform. So 65% or so of flows are still flowing through the large wirehouse platforms. That benefits folks like us who have deep platform-wide relationships with the big platforms at the front office as well as in the field and platform-wide. So not surprisingly, when you look at the structure of the market in the U.S., the large alts platforms who have those relationships, who have the institutional brand are the ones who are getting the shelf space. So I think the winners have largely been determined in the U.S. wealth channel for alts.

In the European and Asia Pacific market, much more fragmented, much less dominated by the wires deeper participation by private banks and asset management platforms, the direct financial advisory community is more entrenched there, too. So you have to go about selling and servicing product in those markets in fundamentally different way than you do here in the States.

So I don't know if I would call that less mature or less evolve, but it's definitely less concentrated.

Yes, more, probably, more resources required as well too because...

Yes. Harder to get at, but back to our market position. I think it's a competitive advantage if you're able to bring product and service it well in those markets, it's hard to do.

Just staying on this theme for 1 more minute. One of the trends and themes we've seen in the space for the last 12 to 18 months, really collaboration with traditional managers and really kind of runs the gamut. Some people will form JVs, some people will do all the things. Some people will buy capabilities obviously outright. We haven't really seen you guys do a lot on that front, if any, of any material size that is out there. How are you thinking about what's holding you back? And tie that to the 401(k) opportunity because it does feel like the targeted linkage is important when alts are thinking about that market?

I don't know if there's anything holding us back, and you've watched us grow the business over many, many years. I think we tend to be a little bit more measured in our enthusiasm for some of these large TAMs, 401(k) being one of them, and I'll come back to that. But when I think about partnerships between traditional managers and alternative managers, I try to think of it through the customer lens and the adviser lens and say, am I getting a differentiated exposure at a differentiated price or access point that I could get otherwise.

And you have to have a view that your business is either distribution-led or product-led. And I think those that are going heavy into partnerships with traditional asset managers believe that there's accretive distribution and that the end client wants to buy traditional product merged with alternative product.

My current view and the reason you haven't seen us entering into these partnerships, although we've had lots of conversations and if the world goes that way, I think we'll be able to participate in that growth is, I envision a world where there's open architecture in model portfolios, and it's our job to deliver access points for people to buy alts alongside traditional assets.

So today, if somebody wants to buy a T. Rowe bond fund, and they want to marry it with a private credit exposure from Ares, they can do that in any number of ways and they could buy it in nontraded form. They could buy it in traded form, they could buy it an institutional closed end form. So that choice already exists. So I just haven't convinced myself that you're delivering a better investment outcome to the client. And I think ultimately, and this will segue to 401(k), the retailization of alts for me is all about access and outcomes. And so you want to broaden access, but you have to do it by delivering differentiated outcome. And I just don't know that when you put it all together, that it's delivering a better experience for the client.

And 401(k) is obviously -- has a lot of momentum. I'm a huge supporter of putting alternative assets in defined contribution plans. What I remind regulators and legislators about when they're talking about it is most Americans already have access to alternatives through their defined benefit plan. So if you look at who some of our largest clients are, they're the largest state and corporate DB plans in the country.

And so the idea that as the market structurally shifts from defined benefit to defined contribution, we're somehow going to take the access to these excess returns away from the individual investor doesn't make sense. But when you start to allow the retail investors to make those investment decisions themselves, it raises questions about investor suitability, fiduciary duty of the adviser and the plan sponsor and all of those things will have to be sorted out, discussed and codified before the channel meaningfully opens up to alternatives.

When it does, it's not as though a switch is going to flip and all of a sudden, all of the entrenched demand for alts that exist in the institutional market and the nontraded individual market, all of a sudden it shifts to DC. And I think you'll see an evolution of that market where younger investors may take more risk in certain parts of the alts landscape then maybe their parents had. But again, I -- it's exciting because it's innovating in the capital markets. It's opening up new access points.

But I also like to remind people if Ares raises $1 in the 401(k) market, I still have to go source really high-quality excess return for the investor. And the binding constraint on growth for us, which is why we've been so focused on building capability is sourcing good assets. And whether the dollar to support that asset is coming from 401(k) or the nontraded market, is not really that newsworthy, right? The growth is going to be driven by differentiated sourcing and portfolio management. And then diversifying the distribution to support that growth.

So I'm excited about it because it's another channel for growth and it's diversifying, but it doesn't necessarily transform the business for us, right? In the sense of opening up a new cost of capital or a new capability set that we don't have.

Yes. And I guess you could -- it sounds like you could approach it in a more open architecture form as well...

I would think that that's the way -- this is my view, I think. If you think about how people are managing their 401(k)s today, that is how people are trained to be in that market as you have a menu of alternatives, open architecture by manager, by risk return and you buy it that way. And so in that world, the key again is going to be to create the right product wrappers and access points for people to access not necessarily to have a deep exclusive partnership with the traditional.

Okay. Let's talk about a couple of other interesting businesses you guys have underneath GCP. The acquisition closed a little while ago. You're deep into integration. Talk to us, I guess, a little bit about how that's coming along, both relative to your original expectations on revenues and expenses? And what do you expect out of that business in the coming years?

Integration is going great. We talked about this on the earnings call. It is on plan from a timing and pacing perspective. It's been a little bit of a drag on margins this year as we're running some duplicative infrastructure in Europe, Asia and our U.S. industrials business. That will start to roll off as 2026 progresses. And so I think we'll see good margin expansion start to come into play as we get through 2026.

I would say on the revenue side, probably better than we thought in the sense that the data center capability that we bought is accelerating in terms of the size of the pipeline and the investor demand for fundraising that we've been able to generate off of that pipeline. So very early post acquisition, we're able to raise a meaningful $2.5 billion fund to support our Japanese data center business.

We're now, as we talked about monetizing the pipeline that's in excess of $6 billion and growing. So that's -- I'd say probably a little bit more upside on the digital infra side of the business. It's been great. I think it's really cemented our position as a real global leader in real assets, both real estate and digital infra. So post the acquisition, we're now the third largest institutional manager of real estate.

I think we're the third largest owner of industrial warehouses in the world. And so that's coming with a lot of brand value, information, edge and data that we can then put back into the platform and monetize. So yes, it's been great.

Yes. Another big business for you guys that's facing some interesting secular developments is secondaries. And for the most part, that's still been a largely private equity centered asset class. You guys had quite a bit of success here expanding into infra. So the infra secondaries business over a $3 billion fund with, I think, another $2 billion sort of related vehicles. So quite a lot of growth there. How do you expect the secondaries market place to evolve and really the role you guys play in that part of the world over the next couple of years?

Yes, this was one that we had real high conviction on 5, 6 years ago when we made the Landmark acquisition to really go after what we saw as some transformational change happening in secondaries. Maybe oversimplifying the business, the way to think about the secondary market opportunity is to look at the growth in the primary market, right? That's our TAM.

And so as you've begun to see deeper penetration of real assets and private credit in the primary market, not surprisingly, you'll begin to see the evolution of secondary solutions in the non-PE side of the atls market. So we saw that happening, and we didn't see a lot of competitive product or capability that was going after those markets.

You had a meaningful transformation also occurring, which was a shift from just LP-led transactions, i.e., large global limited partners that we're looking for liquidity or some kind of a solution for portfolios of LP interest shifting to what the market is calling GP-led, meaning liquidity solutions to the General Partner to help them navigate some illiquidity at their management company, bridge from fund to fund, et cetera, et cetera.

And so that whole world has gone from 0% of the market to 40% to 50% of the volumes this year and will continue to grow at pace. Because of the growth of the primary market, both of those markets will now be growing. I think 2024 market did about $175 billion. That is growing 15% to 20% per year. So you're going to see that market double likely over the next 4 or 5 years.

It is a capital constrained market. So for all of that growth, you probably have 1 year's worth of deployment that is actually sitting in dry powder, which is pretty unique. So there's a little bit of catch-up happening now in secondaries fund raising in order to get after the deployment opportunity. And I think what was so attractive about that acquisition when we made it, we articulated 3 ways that we were going to add value.

One, we were going to open up new markets: Infra and credit, and we've done exactly that. So we've almost from a standstill now created campaign funds in credit and infra that are approaching $5 billion.

We said that we were going to open up the nontraded channel using secondaries as a way to give differentiated private equity exposure to our clients, and we've done that through our PMF product, which is now a multibillion dollar and growing product.

And then we said we were going to make a meaningful shift into the GP-led part of the business because Ares actually has, by far, the largest calling effort in real estate infrastructure and credit on the global GP community. And so all of those hundreds and hundreds of people around the world that we're calling on GPs with loan product are now calling on them with loan product and GP solutions in the form of minority stakes, NAV loans, various fund, finance solutions, GP pref. So we were able to take that 30-year track record and technology and turbocharge the revenue synergies on deployment.

So it's been -- it's been a big success, right?

Yes. And it sounds like a lot of runway there as well. All right. Let's shift gears, talk about a couple of maybe financial questions as well. You alluded to really strong fundraising outlook for 2026 already. So obviously, that bodes well for revenues and taken together with your deployment comments. Maybe talk to us a little bit about margins, profitability. To your point earlier, this has been a slower year for FRE margins for the firm for reasons we've discussed.

As you look forward, it sounds like momentum and FRE margin is really ramping into '26. But talk to us a little bit about what kind of incremental investments you made in the business that sort of supports this faster outlook for FRE margin? And where do you see that ultimately going over the next couple of years?

Our guidance, just to remind people, has been that we would expect depending on where we are in our growth trajectory, 0 to 150 basis points of FRE margin expansion per year. This year, we're going to be at the lower end by design because we're absorbing all the incremental cost and development expense to launch the digital infra business on the backs of GCP.

My expectation is heading into 2026 because of the fundraising success we've had and the impact of deployment on contribution margin that you'll see margin expansion in 2026 at the higher end of the range. So you'll begin to see the benefits of the investments that we've made come through the P&L in 2026. We've also been very consistent for as long as we've been in business. We are more focused on long-term durable growth with margin expansion, not maximizing our FRE margin.

And so even when we have businesses that are generating excess margin, there is a very meaningful strategic conversation around the table about how do we reinvest some of that margin in durable growth, right? So the reason we're at 0 to 150 is we could probably run higher, but we would do it to the detriment of long-term durable growth.

And so we try to get our business leaders focused on understanding that we want margin expansion, but we also want investment in growth engines. And so the places where we've been investing, not surprisingly are where there are big addressable investment opportunities that we feel are undercapitalized, digital infra, real estate credit, infra credit, asset-backed finance. So that's both a team build. It's a geographic expansion and then you obviously have to put systems in place to scale those businesses as they grow and we're doing all of those things.

Yes, makes sense. Ares is a stock. Gives you kind of 2 things, right? Like obviously, the growth has been good, but you guys are also paying a very healthy dividend and a robust capital return framework has always been kind of part of the pitch to the investor base.

Over the next couple of years, the performance-related contribution to the business is set to scale pretty meaningfully. And you can see it, right? It's quite visible given the European waterfall now structure for your credit funds. Gives you a lot more free cash flow. How are you guys thinking about redeploying that free cash flow, whether it's higher, faster dividend growth? Is there opportunity for deleveraging, buybacks, more M&A?

Talk to us a little bit about that.

All the above, yes. We'll know when we're in that market, and we see what the pace is. I think the good news is we have a lot of experience on inorganic growth and knock wood, most of, if not all of the acquisitions we've made have been underwritten with a lot of financial and strategic accretion that's played through the business.

I think we've done a really good job on organic growth initiatives and opening up new markets and building new teams and innovating around product. We have good experience using the balance sheet for strategic growth initiatives. So I think the answer is going to be all of the above.

As a management team, we're thinking about directing that capital to its highest and best use and its highest return. If that highest return is a buyback, we would do it. But my gut tells me that when we get into that phase of our capital management, it's going to be more about redeploying that capital to, again, create more durable growth engines around the world.

Great. Okay. Well, we are out time, so we'll leave it there.

Thank you.

Thank you so much. Great to see you.

You too. Thanks for having me here.

Yes.

All right. I know everyone is eating their lunch here filing in, but why don't we get going? Hopefully, everyone can hear us okay.

My name is Brian McKenna. I cover the alternative asset managers and the BDCs and equity research at Citizens. I've actually covered the space for over a decade now. So I've seen firsthand the evolution of the industry, the business model, what's been incredible growth and most importantly, really strong investment performance. I have seen a few of these double-digit drawdowns in the stocks as well. They're never fun in the moment, but I think one word that I would use to describe the industry is resilient. So the next 50 minutes or so, we're going to talk about the industry. There's a lot to cover. We'll talk a little bit about the past, a lot about the present, everything going on and kind of where we go from here.

So it's great to have two leaders on stage with me today. Marc Lipschultz, co-CEO of Blue Owl. He founded with a few others, the legacy credit business at Blue owl. Owl Rock back in 2016. Prior to that, he was a long-time partner at KKR. We have Kip DeVeer from Ares. He is now Co-President of the firm, also a longtime partner. He previously ran ARCC and was Head of Credit. So it's great to have both of you on stage today. There's a lot to cover.

Kip, maybe to start with you, I'd love to just hear about how the new role is going as co-president, how your day-to-day has changed a little bit. I'm assuming you're doing a lot of this stuff, seeing investors, et cetera. And then the two co-President announcements at the firm, how does that coincide with just the natural evolution of Ares?

Yes, sure. Well, it's nice to be here. Thanks for having me. So I'm joking around a little. So I was already doing a lot of this, now the good news is I get to do it with a better title as I was joking around. So that helps particularly in other places, not like New York, where that matters more. But yes, obviously, I've been with the company for 20 years or so, I've kind of been there through the growth and the evolution of everything that we've done. And I think coming up through the private credit side of the business and then taking over credit actually, I think, in 2016, when you guys were getting started, Marc. We have 5 businesses on the credit side. So it's two direct lending businesses in the U.S. And in Europe, we have an asset-based finance business. We have our loan and high-yield business, then we have our opportunistic credit business.

So the short answer to your first question is I kind of worked myself out of a job, which means we have a really, really great deep talented venture people in all five of those businesses. So any of the strategic stuff for hiring or just changing of the strategy and the people was really done.

So I went to Mike a couple of years ago, and I said, I think there are a lot of other things going on at the firm that are pretty exciting where I could be valuable. And obviously, with the transition with Blair not getting promoted in February. Blair, just by way of background, my co-president is based in London, spends a lot of time in the States, was someone I hired to really help drive the growth in the European direct lending business in 2013. If he were here, he'd probably say the same thing. He worked himself out of a job a little bit too. That's a hugely successful business for us. So we're both able to spread our wings doing different things.

So what the three of us agreed on was we have a couple of things that we're working on, I'd say, at the enterprise level of the firm, things to do with sales and customer-facing things, and there's always operations and technology improvements. So we have our hands dirty in a handful of those things. But then we each, Blair and I, took a couple of different things to really lean into the opportunities that I saw that I'm spending a lot of time on today include everything from our real estate lending business to our Infra Debt business, which unlike some of our other friends and competitor firms actually don't sit in credited areas, they actually sit in our real assets team. So trying to bring a little of what we've done in credit to those two businesses and think about talent and think about maybe additions that we might need to make either to the existing team or new geographies. And it also coincides quite a bit with what we're doing on the insurance side, which I know is a focus for you. Obviously, there is a desire, I think, for many insurance companies to figure out how to access alternatives in a way that they never have before, and they're in a particularly tough spot with how tight IG spreads are and the way their balance sheets have worked.

So that's a smattering of the things that I'm doing, but it was hard to give up my time in credit. Obviously, it's our largest business and most of the people that are there, folks that we've hired over the last 20 years, but it's great for people.

That's great. And then, Marc, you're looking at the early days of Blue Owl, Owl Rock, going back to 2016, really a direct lending business fast forward to today, it's not just direct lending, you have asset-based lending, you have digital infrastructure, GP stakes, et cetera.

So talk about the evolution over the last decade, you've been acquisitive, and it would just be helpful to kind of from your perspective, think through and walk through just kind of the natural evolution of your business as well.

Sure. Look, it's great to be here, Brian, your understanding of this industry is, I dare say, unique and so with the superstar of the industry is a privilege. So I -- look, we've come a long ways in 10 years, but I think some things have stayed the same. So maybe I'll start with what's the same and then we can talk to the evolution.

What's the same was we started the business with a couple of key principles in mind. One was that we wanted to be a capital solutions provider. That is to say the picks and shovels provider to the gold miners, or whatever metaphorical example you like. Our job is to provide bespoke solutions to ultimately what's proven to be a wider range of users. But that was the principal first. And the reason for that, very importantly, number two, was to architect a set of investment strategies for investors that are much more about downside protection, principal preservation yield, and that's the common thread when you look across the things we do. And well, it's many more than it was 10 years ago, they're actually still very much adjacent and that's the common threat is there very much about the -- how do I protect capital and make a nice return sort of in that order, if you will, and perhaps prior to that. And then -- for 21 years before, mostly have the character of "how do I get kind of maximum returns and manage the risk to go with it".

So that was two. And then third was the idea of serving the individual investor and the institutional investor as true peers and not as this, I'm an institutional business, and I can deem to do business with these individuals. So those are the three premises. And those are consistent. And so I guess, today, I would characterize that as really the DNA of the firm. And then what we've done is where we see opportunities organically or through acquisition, to deliver on those promises, that's how we've built the business.

The bulk of our growth has been organic, the substantial bulk of our growth. It's true. We've done a number of which we're very happy about, of acquisitions. In a way, the number of acquisitions probably -- I don't say it's misleading, but actually as a percentage of our enterprise, each one was quite small. And then we've taken them and done organic things with them. So if you take our real assets business, at the time that we acquired what was then Oak Street at $12.5 billion of assets. And today, I think we're $45 billion of assets. And now last year was the largest real estate fund raised in the world, I think, our continuously offered product in real estate is thriving. That now has over $7 billion of equity in it.

So I'm not going to go down this rabbit hole, but the idea being that it's where can we find strategies that deliver on that promise from 10 years ago, and are additive to what people want in their portfolios today.

I'm not going to speak for you, but I'm going to add something on that we talk about a lot, which -- and I think you guys -- knowing you guys as well as we all do know one another and respect one another. A lot of these businesses actually operate better at scale, and they operate better if you can manage them in a global way, right? So the acquisitions that we've done have been really to add complements to what we started as a credit business. So it is, its real assets, it's secondaries. It's other things that all of our investors, when we talk to them day to day, want to see from a large diversified global firm and most of them actually view us as better positioned to manage those assets as an integrated manager than as a single strategy manager.

Yes. And one other comment on that because this is a commonality between our firms. That said, there's another version, and this is neither good, bad or otherwise, it's just strategy. Some versions of the alt model are all things to all people. And that's not our model, and I think I can for Kip as well, it's not their model, it is about certainly multiple different ways to deliver for investors and to win for our shareholders. but it's not everything. And I think it scales hugely important in each business and collectively. On the other hand, it's very hard to be good at everything all the time, and you got to know your strengths.

That's great. And I guess sticking on the point of scale, I think a lot of folks that look into the industry from the outside, like they see firms getting bigger and bigger and they think it's a bad thing. But to your -- both to your point, like scale is critical, scale creates the outperformance. So maybe just talk through this a little bit more, like from your seat, why is scale so important? And what are the competitive advantages and really how to scale, create differentiated returns for your investors?

Yes. I'm happy to start. So here's the thing, too, like scale is not a monolithic term and in some worlds and some strategies scale is decidedly advantageous and others, it's not in credit or -- I'll call it even generally, these capital solutions products more generally, scale is undoubtedly a uniformly advantageous fact. It's about more origination, more underwriting and ability to participate with the largest companies with their solutions. You want to do a big financing and you're a big company and you're a big sponsor. There's only a few people you're going to call and a couple of us are here. I don't say that with any arrogance. I say that with the benefit of the scalable solutions. And so there's only an advantage to be able to see more credits and see bigger credits and see better ones and then be one of the few people that's positioned to take advantage of them.

That's not true of every strategy, right? Let's take the opposite version, which obviously has nothing to do with it, we all do. Venture capital is not like, "oh, it's just uniformly better if you just raise more and more capital and you're bigger and bigger", it's just not true. In fact, evidence will probably to the contrary. So I think it's important to know what fits your model here, take the other side of it, the contra, like why would you want to be smaller? So you can see fewer things, so you can lend smaller companies?

And have less information.

You have less knowledge, less credits like honestly, they're just -- other than the -- what is not accurate, this argument of ,"Oh, we get better spreads, better agreements", which is just not true in the smaller market. There's just no advantage. And in fact, you've seen this. That's why today, if you look at the scale participants and again just PIK credits as a discussion, it's the same people that were really big five years ago have just gotten bigger and that's actually a very rational outcome for this business because it's a better way to do credit.

Anything to add, Kip?

No.

And I guess just going back to the business models a little bit because I think this is important. 5, 10 years ago, the industry was primarily some private equity funds, some direct lending funds, some liquid credit. You fast forward to today, you have capital-light businesses, you have capital intense, you have on balance sheet insurance liabilities, you have transaction fees, et cetera. So the models have evolved quite a bit. And I think all -- you and your peers, you're all kind of doing the same thing, but you're going at it at a little bit of a different angle. But I look at Ares and Blue Owl, both models are capital light, they're fee-driven, they're FRE-centric. So just walk through -- I don't think it's a coincidence that both of those models are like that. So just walk through why capital light and why you operate the business that you do? Maybe to start, Kip?

Yes. I mean I think it's really important you point that out because we have a lot of folks that come into our office and start asking us questions about our company that seem like they're better suited for not our company and you can probably guess at what I mean by that. People have ended up going different directions, I think, based on their own experiences with how those companies got built. To your question, we've tried to keep it incredibly simple, right? Ares is an asset management firm with strong expertise across a wide variety of alternatives. And to Marc's earlier comment, we don't participate in every portion of the market, but we want to participate in the areas where our investors think we can bring them value and great performance. But at the end of the day, for the folks that are buying our stock, I think they love the fact that we've been able to grow both organically and inorganically with a very simple business model that at the end of the day, I think, is quite easy to value and as other than maybe the last three or four months has proven to be the case.

Yes. I'll just echo that, look, at the end of the day, our businesses both are highly cash generative. And obviously, we've equally made the selection to give that cash to our shareholders. I guess we don't think that there's anything we're going to do with that capital internal to our balance sheet at scale to be better than smart people in this room can do with that capital. If that were strategically relevant, look, you can't be Apollo and the same time be an insurance business, "Oh, I'm going to be capital light". Now you can serve the insurance industry like we all do, you can have a small insurance business, but that's just a fundamental strategic question. And again, I don't -- it doesn't make one model right or wrong, but you definitely have to know what your model is and build a business that's consistent with that.

We build businesses that are all about fee income, fee revenues, our entire revenue line is fees, our entire revenue line. So that's just compatible for us with having a high margin, high cash flow, high dividend stock.

And it kind of goes into my next question. I feel like every period of volatility we get -- I've covered the space, again, 12 years. So it's like every few quarters, you get these periods of volatility, people are very negative on the sector. When I take a step back, I look at my alt coverage collectively, there's $600 billion, $700 billion of dry powder. And so I think some folks forget volatility is actually a good thing for your businesses. And so spreads have been tight, you get some volatility, they gap out, you can deploy capital into higher-quality companies, better spreads, et cetera.

So just from your standpoint, like -- why is that so relevant? And I think, too, like you go back and look at where the outperformance comes from through the cycle, it's periods of volatility.

I'll take that because that's where I was going to kind of lean in, but we've actually, I think, developed real expertise in all the assets that we manage, frankly, in volatile markets, right? We tend to see accelerated growth during periods of volatility. We like that. I was having a meeting before coming over here and not to give you my commercial on where the world is. But my thinking is actually, if you had asked me three years ago how you're going to see things with a dramatic monetary tightening cycle and all of that, I would have thought you would have seen slower growth, higher defaults, worse credit performance, et cetera, and we're just not seeing it. So rather than talk about first brands, I'll just leave that there.

But I think the problem is that markets -- Marc and I were just talking about this, markets generally feel kind of expensive particularly here in the U.S. because I think a lot of global investors that we talk to continue to believe, despite all of the negative headlines, people were concerned not to be political, People are concerned about Trump, then came liberation Day. And now everything is rallied back, say, for maybe the last couple of weeks to be all-time market highs, tight corporate IG spreads, really tight leveraged finance and that's in response to the fact that the economy is good and people want to invest here in the U.S. So I'd be happy if things were a little more volatile in the next year or two because I think we'll succeed as a firm. And I'm sure Marc would say the same thing.

Yes, we -- volatility is fine. And remember, our capital is largely permanent and our -- so we're quite happy with there being today, a good luck underwriting a syndicated loan or a bond deal because the market's wild and wooly in terms of trading behavior, not fundamentals, right? Our businesses are doing great. Businesses are doing great. Our portfolio is in great shape. But obviously, the market is all now stirred up about whatever this constellation is of fears. And so that's good for us. I mean that means more people come to the private market. It means on the margin, terms are better.

Risk premiums are higher, investing is easier and all of that.

And it reinforces our model. I mean like today, like to me, the irony will be the -- now the new one is data center overbuild. People should make as much noise as they want. That would be great because then we'll just all get to do more business with five of the most highly rated, biggest market cap companies in the world.

And so on the point of pretty healthy valuations, things have really recovered off of the April lows. I mean, you still have capital to deploy, right? And there's a lot of perpetual strategies in the industry that are raising capital on a monthly basis. And so I guess, where are you leaning in from a risk-reward perspective, right? You have capital coming in, it has to get deployed. And so where -- how do you make sure you're deploying into the right assets, the structure is right and you're getting paid for that risk?

Yes. And I think there's value in a lot of asset class. I'll just say one caveat for us is we actually, I think, have been thoughtful entering the wealth market and raising capital there in terms of open-ended strategies where we really don't want that capital to kind of overwhelm us as we always say, fighting the inflows of those, i.e., to deploy because you have those inflows can be very dangerous.

So the firm today, I'm just going to use rough numbers because I'll get them wrong, manages about $600 billion of AUM and I think our flows through the wealth channel this year will be about $16 billion, $18 billion. So for us, that's pretty manageable. We don't feel the weight of deployment. The way that you counteract that, and I think Marc said it before, is the scale of your origination teams are key. We have 4,000 people in 50 offices. You find a lot of deal flow when you have 4,000 people in 50 offices. So that's kind of how I'm thinking about that. But for us, I think unlike maybe some of our friends in the industry, it's a little bit less of a concern. It's something that we're really conscious about being careful about how we grow in that channel.

Yes. Got it. And I guess on the flip side of that, kind of going back to periods of volatility because, I guess, the way the stocks are trading, it feels like you're going into this credit cycle, things is going to get really bad. And so I think -- and I believe I asked it on the ARCC call, but when you look back at periods of volatility, I mean, how much excess return has been generated across some of your strategies? And again, I think the beauty of the model is you're not a fore seller, you can lean in during periods of volatility. But like is there any way to quantify that?

One thing that's important, I think, to probably start with is in our world -- and again, be careful because our worlds have lots of different components to them. But for the moment, let's just -- let's talk direct lending, which I think is often where people's focus tends to be coming at the moment. The -- in a way, it ultimately is a relative product, right, at some level, and in some level snaps to the product.

The absolute part to your earlier question, we say where to lean in, actually, even that sort of frame of reference doesn't tend to be what we all do in our core businesses because actually, it is to have a standard of credit that is incredibly high. And that's why we have such durable books, such low vol losses. And that's actually bedrock, right? And what's really happening is deal flow may move around that standard, but the key is to be large enough and disciplined enough to hold the standard. And that means, yes, you'll have some periods where we deploy more, some periods where we deploy less.

So even like kind of the lean in mindset doesn't exist within the confines of, if you will, maybe a narrow vertical other than to say that with regard to looking for opportunities, key is for us to make sure on the relative basis, we're always commanding a very attractive premium for our investors for being a part of our product relative -- we don't -- no one wants to live in a bubble, it'd be silly to say it just doesn't matter what the market is. But if you look practically speaking, over any long period of time in the modern version, where we're large-cap solutions, spreads go up and spreads come down, they live in a band. I mean there's a spread level where it just doesn't make sense for us to be active lenders, and there's a spread level, by the way, on the other side, where it doesn't make sense for you to be active borrowers.

And so if you look, it's just this amplitude and this -- and remember, the portfolios have hundreds and hundreds of names in them. So the portfolios aren't like today's spread. The portfolios have some things from today, they have some things from last year, they'll have some things for next year. So I think people are getting way too micro focused about this moment in time and kind of missing the bigger picture, which is great, consistent premium with great credit protection that really works for investors through thick and thin.

And if you're really worried, I'll just leave this, if you're actually worried about private credit performance, then as soon as we leave here, everyone want to like get out of their stocks and get out of their private equity. And I mean remember, we're at the top of the stack, senior secured, like by the time you get to that, if that's where your concern lies, you're skipping a lot of steps between here and there.

That's sort of the big miss that we have a lot of the same conversations with many of the same investors. But this -- and look, I've kind of been one of the early players, obviously, in direct lending. So I've heard this story a lot, which has been wrong for the last 20 or 25 years pretty consistently. But Marc's making a really important point, which is there are billions, hundreds of billions of dollars of hard invested equity below the private credit industry as a whole. And I'd also remind people it's really not an industry as a whole. It's an accumulation of different managers, some who are quite good and some were not.

So I think that manager selection is really important. And with some of the -- let's paint the whole thing with a broad brush coming out. It's just not a really very accurate way to think about analyzing a market or analyzing returns. But again, just back to longevity in the space, we reported our earnings at Ares, whatever it was a couple of weeks ago, and the results were quite good, and a bunch of the people in our room were like, "Oh this is great, we're going to put great numbers up. Stocks going to go up 10%". I'm like that stock is not going to go up. Yes. And they're like "You don't think so?" I'm like positive.

It was 10%, it's just...

Like I'm positive it's not going to because you catch these moments of sentiment and you can't do anything other than focus on what we've done historically, which is just do your job and generate really good performance and really good results and let the results speak for themselves because if people are looking for things around the corner, and we're able to put up four quarters of great future earnings, people are going to feel a lot better. Let's keep it simple.

Yes. And kind of transitioning a little bit, but covering the BDCs as well, I have a whole new appreciation for the portfolios, ARCC, OBDC. They're performing incredibly well. And I think people don't understand or fully appreciate the diversification that sits in both of those vehicles, right? The average position size at ARCC is sub-20 basis points. If you look at OBDC, I think it's about 40. And then the non-traded, it's somewhere in between. So talk about the diversification of kind of the direct lending portfolios. You have a turn of leverage. LTVs are at 40%, 45%. To your point, the amount of equity cushion that sits in these deals. And because I feel like I have a lot of conversations where it's just educating on some of those dynamics. But when you kind of put all those things together, I mean, what -- how bad could things really get?

So I'm just going to go back to one comment and then I'll let Marc speak but just having been CEO of our BDC for 10-ish years or whatever it was. It's actually something that BDC investors don't talk enough about and you say, "Oh, you guys have these huge diversified portfolios", which we do, and they don't use a lot of leverage, which they don't. That's not what every player in the space does. You see a lot of direct lending portfolios that have 50 names in them that are levered 3:1.

Back to the scale point. Would you want a 50-name portfolio?

Totally different potential for outcomes, right? So I think you're complementing us which is great, but I think we both positioned ourselves appropriately to manage the asset class well.

And I'll just add a piece of math to that. I agree entirely. I think also oddly when you try to do the stress tests, I think people leap from just, well, let me just suppose there was some sort of set of problems in the world, which, a, starts with a premise that the data doesn't support today. But it doesn't matter, just okay, but I'm contingency planning. The durability of being a highly diversified pool of senior loans with deep equity cushions beneath them, that, in turn, are generating a 10% return, you start doing the math and it actually becomes to use -- some have used this word, but it becomes impossible in a well-managed, well-diversified portfolio to create the kind of problems people are trying to dream up, right? Like just do some math and go from a world and just simplify it. Let's just take default rates in respective portfolio under like 1%-ish multiply by any number you want and reduced recoveries from historic levels of like $0.70, reduce it by anything you want and put that over any reasonable period of time and then compare that to the fact that there's 10% coming in every year, like you can't do it. And yet again, the leap just goes from this noise generating machine into...

Your point on the equity is super important, I was sitting in a BDC meeting a couple of years ago, I think, with our CFO, Scott, who I see back there. And I had somebody who I'm not going bus "Let me go through your first lien portfolio", and it's 55% or 60% first lien, and let's say, the defaults there get to 5% in recoveries in any case. This is a quick analysis they're like, "So then I think your NAV goes down by" and I'm like "Guys, what happened to the other half of the capital structure invested in equity? Is it all just gone?" And they're looking at me like I'm nuts, so I'm like "Man this is frustrating".

Yes. And that's the opportunity today because I'm looking -- like clear that our stocks are collectively traded with this bizarre fear factor well, that's the opportunity for investors. And I -- what Kip said like, "Look, we just keep executing. We know our businesses are working well". And that's not to be dismissive. Listen, we hear concerns. We all care, on their end it's not useful for us to come in and just like complain about our lot in life, we have great businesses and they're working well. So we've just got to keep doing it. And they try our best to clear the signal and the noise.

I think there's also, and maybe it's true, of some participants, but we're talking about how this industry has sort of evolved. And I really very much think that indirect lending, in particular, like the winners are already the winners and they're not going to change anytime soon because of the advantages that we've built that are very difficult to break down and compete with, right?

But there's sort of this narrative, and it's largely in the press, and I was with Bloomberg a couple of times yesterday. So I said it to them, just joking around. But I'm like there's sort of this narrative that everybody in direct lending is sort of like unwittingly participating in this massive growth of an asset class that we're all like just growing -- not looking at risks, not being concerned to Marc's point at all. And it's just -- it's a little bit silly because we've kind of set this business up very intentionally over a 20-year period and have demonstrated great results for investors. So this notion that like, "Oh, you guys are benefiting from a lack of regulation" and the fact that no one wants to do this business except you. It's just a little bit insulting.

So what do you think changes that perception, the misinformation that I see is incredible. And it's -- part of my job is getting the facts out into the market, I'm bullish on the sector. But it feels like every period of volatility like -- there's a new cynical narrative that is coming into the market. 10 years ago, it was private equity marks are garbage. Those portfolios are worthless. Then it was the energy and then it was PIK and here we are, it's all private credit. And so I mean, is there like -- is it education or maybe it's just how the markets will always be but like does that ever change? And if it does, why?

I mean I was with one of our friends in the industry -- I do think that private credit and the BDCs broadly have not done a good job telling our story. And it's not for lack of trying. I can promise you, we've all tried. But whatever we're doing, we're not landing as well as we could. So I think it's on us to say, what can we do better? I come back to what I said before, which is individually and as a firm at Ares, all we can do is keep develop -- is keep showing that really strong result because people pay for performance. right? So I'd come back to that. But I do think it's a good question. There's something that we could and should be doing better than we've been doing for the last 10-plus years.

And I also think you kind of break it into two pieces, right? -- there's the authentic GI, this is bigger than I understood and I don't really think I get it. And there are particularly, I think it's our job. It's no one else's job or fault like to go out and explain some of the things, Brian, that you explained to people and that we're all talking about today about the portfolios, what we do and how we do it and the nature of the structure of the industry. And then there's a group of people that are just -- it's a self-interested side of attacks and that can be those who compete with us. That can be -- look, negative stories get a lot more clicks than "Hey, you know how great Ares is?" like it's just -- that's just how it is.

When was the last time you bought a magazine that was like "It's sunny and everything is...

Yeah. Right.

People are like, boring...

And that's the world we live in, right? So some of it's intentional, some of it's unintentional and we'll try to do our best with the unintentional part, I think. And by the way, it has happened over and over. You just talked about the sequence, like where everything trades down now, all the BDCs, all the stocks. And the pattern is kind of obvious. There's a tremendous pull on all of these portfolios over time, all of them that are well done to par. But that's the pull to par over time when you -- and so you go through these panicky moments and people say, "I knew it, time has come". And every time the same thing happens, I predict the exact same thing will happen this time and results will be the real proof in the pudding and it's -- it will be forthcoming.

But it's true that -- remember the pandemic? That was going to be the end of it all. That turned out to be a great opportunity, actually, private credit right? Then there was a run on the banks, Silicon Valley Bank, "That was going to be it" No. That's okay. That's fine. There's going to be liberation day. Wait, no, that's fine. And all you do is you trying to answer this, well, you never know, like, okay, we can be in a simulation right, you'll never know. I mean that's like that's a very unhelpful argument.

This is -- the other one that gets me is that the asset class has never been tested. I'm like, I don't know, we're managing $80 billion of private debt from our like houses when companies had no revenue and no one could see each other during the pandemic, we ran a public BDC through a I hope the greatest financial crisis we'll see in our careers on Wall Street, so to speak. So I mean it felt like a test to me.

Yes. It was pretty hard. And I always like to say this and someone asked me why and I think maybe it's just a guy trying to sound smart. But I mean, the Medicis were doing private lending like 600 years ago, like it really is so not a new idea, but more to be non-facetious about it. Leverage lending has been an active -- and I was doing LBOs, when they're called LBOs in '95 using leverage loans, just putting the word private in front of them doesn't make them not credit. Again, that is also a very strange mindset to say, yes, but private credit, right? You mean the ones with the better documents and deeper diligence. Okay, right. So let's go look at the ones that don't have that and see what they did during the financial crisis. But like some others like forget all that, it's just this imaginary new thing called private credit.

Got it. Another topic, I know you guys are getting a lot of questions about it. Software lending. So in this new era of AI, I think there are concerns about the quality of that portfolio. Again, I'm quite familiar with OTF, the Blue Owl's tech lending, BDC, ARCC gave some great color on the earnings call on the software portfolio. I mean, you look at all direct lending, that sector, those portfolios are probably the highest performing highest quality parts of the portfolio. So why is that -- you're getting paid additional incremental spread, lending to those types of companies. So like let's just walk through why that portfolio is performing so well. Are there any like -- how do we, from the outside, think about the risks as AI continues to come into our lives more and more? And kind of just walk through that and what's driving that?

You want to go since you guys have OTF, I mean happy to come on?

Yes, I'm happy to comment. So maybe to your point about the focus on software is because like life loves irony because it is the best performing area in our collective perspective portfolios. OTF, which is obviously therefore visible and you can look at it line by line. Our default rate in OTF is 3 basis points. We've never had a loss on a software loan on OTF.

That's why [indiscernible] I was waiting for the status to...

I mean it is -- and I get it and then we got to get to, "yes, but what about?" Well, what's really happening in the vast preponderance of the software businesses we finance, and again this is one I'll say never. I'm sure some software company will have a problem. And all of those many, many, many line items...

There are a couple of bankruptcies that doesn't that's nothing endemic...

Exactly. Okay. It happens in every industry we've ever been in. If anyone tells you they're doing lending, they'll never have a loan problem, and you're in the wrong place, right? What's happening really is to use the current terminology is agentification is happening on top of the current software platforms. They have the customers, if you pick the right ones. They have the data, they have the moats that go with it. They have the workflow. And very importantly, when you pick industries, it's not like we just think any software business is a good business. You want someone who has a very large share, controls the data and very importantly, has a zero tolerance environment. Our biggest sectors are things like financial services, regulatory, health care, that's not a place where you can say, "Well, what a pity that the AI in that case happened to have hallucinated your disease". I mean it doesn't work that way. And so...

I'll interrupt you for one second. Because that's kind of a big miss. We always -- Software is not an industry. It's a product, right? And it's end markets, deliver into a wide variety of you hope, defensive, not cyclical end markets where their products are really important to these end companies that are probably not experiencing difficulties in a recession. And even if they are for us and I think for you guys, too, this is software they really can't shut off. This is like essential to driving their day-to-day business and the management of that business.

And remember, our average loan duration in any of these portfolios is about three years in terms of actual time outstanding. So we're not even -- we don't add in three years, right, that all this happens and the software companies aren't paying attention. They are. They did learn a hard lesson, right? The legacy software companies learned a very hard lesson through the SaaS transition, a painful lesson. It's not they're gonna sit and saying, "No, I never saw this movie before". They're saying, "I know exactly what this looks like" you all -- many of you invest across sectors. It's not there software companies are saying, "Yes, that AI thing, forget that", right? They're all adopting the tools. So I don't know who will win 10 years from now, but it's really quite an important to lending portfolio like ours.

And then LTVs of the software portfolio, can you just remind us where those sit today? Because I think that's another important stat. Is it 30%?

Yes, close to 30% is the loan to values in these loans at time back to the point, time you do a deal, typically, it's 30-something, 30-ish percent of a software deal where it's 40-something of a non-software deal. Both are low. But again, if you want to lover the risk, the fluctuations on and it's true that software people got pretty hyped about it in 2021. And maybe this is the growth, maybe this isn't the growth. But if 70% of the capital structure is equity, all of the shock absorbers just to the question of the equity results. It's nothing to do with the debt results.

Shifting gears a little bit. So I mean it's funny. Like people talk about private credit, the last few years, 5 years like it's really been direct lending, right? And so now we're getting it -- I kind of call it Private Credit 1.0, 2.0 is all asset-based lending. And really, that's where a lot of the growth is going to be coming from.

So Kip, you and Ares have built an incredible alternative credit business really from scratch organically. And just talk a little bit about that strategy, the assets you're acquiring and it's pretty similar to direct lending in terms of the process and how you underwrite, but where -- what does some of the differences look like just to the regular direct lending space?

Yes. I mean -- so our entry really came out of the great financial crisis. And I mean, because we come from kind of the direct lending background at least a lot of us, the experience that we had setting up the businesses and direct lending are very similar to the experiences the alternative credit teams have had setting up at Ares, where they basically said, "Everything I do at a bank, I can't do anymore", right. And it was partially because of regulation, it was partially because of the way the banks thought about risk changed. And what we wanted to do because actually the impetus was investing in other people's CLOs. So that was the first business that we had back to '07, '08, probably managing $2 billion or $3 billion of capital doing that. And we realized that all the other businesses built on securitizations were never going to come back, particularly in the middle market securitization.

Because of your bank in 2007, if you did a big securitization that you could rate and sell, you sold that to a financial institution, that looked a lot like us, a leverage loan. All the middle market stuff that used to sit on principal desks in banks, guess what, never came back, that to us, look like a middle-market corporate direct loan just with different underlying. So we went out and started hiring everybody who got fired from 2009 to 2012, and there are a lot of good choices. But we wanted to come at it with people that could really evaluate a multitude of different assets. And what was happening back then was so and so, it was like, "I'm an aircraft leasing guy. I'm going to pop up an aircraft leasing strategy". And we wanted to be very agnostic in terms of what the underlying collateral was because we could move around. And we could really select what we thought was a great risk reward. So I mean our asset-based business today is now about $25 billion of sub-investment grade money that's looking for a higher return, call it, 10% net at a minimum. And then we do have with some of our friends with big insurance companies talk about, which is the investment-grade substitute business, that's about $25 billion as well. But inherently, all of the business is built on direct origination. And that can be a direct origination to banks, but it can also mean a lot of direct origination in the company. And we're not doing a lot of consumer right now, but it's everything from consumer to hard assets to royalties, really see any pool of underlying assets that pays a coupon that's not a company. And you can lend to that asset, you can buy the entire pool. And the way that you buy those assets as a lender or as an owner expresses your view on where you think the appropriate risk return is and how you want to enter that. So it's been -- for us, I know you guys bought some friends to get into the business who -- friends at [ Adilly ] who we've known a long time. There's one of the guys that runs our alternative credit, was Ivan's partner from the early days...

Yes, I know.

When they had like 8 people or whatever it was.

I'm in lineage.

Which is funny. So they all kind of grew up in the business together. But look, we think the end markets there are enormous. Like direct lending, we don't think the banks are ever going to be able to get back into these businesses. And frankly, the people who work at Ares and at Blue Owl aren't going to want to go back to the banks to run the businesses. So it's been a huge growth business for us. We think it will continue to be.

And adding one feature to that, it has an even higher barrier to entry, which is great, now being the managers for a moment, it has an even higher barrier to entry because someone may very well convince themselves and some LPs like, "I'm going to go find the next widget manufacturer, I can figure out how to make a loan to that". You can't say, "Oh, I'm going to figure out how to make a loan to these 1000 medical equipment leases", it's a super data-intensive business. And it's evolving the same way where there are bigger people originating portfolios that need a sophisticated durable partner so it's really quite appealing because the barriers are even kind of...

The thing that's cool to is when you talk to investors, just having -- I mean, like when I joined Ares in 2004, we would -- we were $3 billion of AUM, 60 people. So we go out and we'd talk to institutional investors about direct lending, and they're like "That sounds kind of neat, but like we don't know what that means, like we don't understand that", right? Like we have a fixed income team, and we have a private equity team like where do you guys fit and we're like, "We kind of don't. We kind of fit in the middle". This asset class is the same. There are so many large global investors that understand that there's something exciting here, and they're like in the first inning of scoping out how they want to get exposed, which managers they want to select for mandates, et cetera. So it's -- we think it's a huge opportunity and I know you guys do too.

Yes. And I guess thinking about like the adoption of private capital solutions, right, started it as private equity and then direct lending and then carry our alternative credit digital infrastructure, and you kind of keep going down the list. But when you look at the adoption of private capital today, I mean like where are we across the spectrum, Direct lending is probably a little bit more mature, but you look at some -- like digital infrastructure and asset-based lending. I mean like what's the opportunity? I mean, is there a way to think about the TAM there at $50 billion, I'm assuming that could be multiples and even Atalaya now alternative credit, that could be $12 billion, $13 billion today in 3 to 5 years, like what is some of these end markets in terms of your business look like?

Well, a couple of comments just to build on what Kip just said, for sure, on the asset base side, like this has taken directionally, cut it how you want, it's a bigger addressable market than direct corporate credit. It doesn't matter if it's a lot bigger, not a lot bigger or...

Everyone draws the map a different way and whatever, but I agree with you. Yes.

So let's just start there. So it's a bigger addressable market that has penetration that looks a whole lot like corporate direct lending 10 years ago, a lot like. Digital infrastructure is obviously emerging at scale in our -- in my wildest dreams, Brian -- I think I can speak for both of us, I don't think we ever started a business thinking, "You know what I'm going to do? I'm going to be a lender to Microsoft. That's what I'm going to do". I mean that was not part of the playbook, but that's what we now do because it's scale solutions with very bespoke attributes with an ability to build an asset they desperately want and need and what a great partner to have.

So the world is getting bigger because -- it's not going to eliminate and the public markets are phenomenal for so many things. And this is part of -- if you like to set up this like battle between the public and the private. We do something very valuable for a certain side of users. It's a big set of users which is we have very long-dated solutions, very bespoke solutions and we're your partner for the long term. And that has real value you'll pay for some people. right? And the public markets do some other things. They cut up really high volatility risk that none of us will take in our book into lots of small pieces, that's really good because we're not financing have this really neat idea to build an LNG import facility like that's not what we do. So you need both markets to be healthy. But they both have a reason private markets are just finding part of any market that exists to be a private market solution. In some cases, it will be a big part of the market. In some cases, it might be small, but because it works for the investor, it works for us as an asset manager, and it works for the user of the capital.

Just a couple of final questions to wrap. I mean kind of going back to the macro. I mean, again, another thing, dynamic that's underappreciated is the amount of data that sits in both your firms, right, all the different data points. But from a macro perspective and underlying growth perspective, I mean, what are your firms seeing in terms of revenue growth, EBITDA growth, maybe some of that has to do with the sectors you're allocating to, but I mean, what is the house view on the macro over the next year, one to two years?

I mean I think our simple view I mentioned is the economy is good. You made the point about industry mix. I know you said this on the BDC calls, but our mix of companies should be growing faster than GDP, just that's obviously by design. The BDCs had numbers that have ranged from 8% to 12% over the last six quarters. That's pretty high. My own view is things are slowing a little bit, but it depends really on the direction of rates. I personally think rates will stay higher for longer. Inflation seems like it's more or less under control. And away from the lower-end consumer spending is pretty good. The employment picture is pretty good. I don't see a huge need for lower rates. So I think we're in kind of a nice coupon clipping credit actually environment that's quite good for credit.

I mean, that's perfectly said.

Okay. And then maybe just the last question, let's fast forward, call it, five years outside of maybe a robot asking you guys questions on stage about PIK income...

My robot will answer those questions.

That's right.

And we're getting fed the same answers we see today. What does the industry look like? Who are the winners? Are the winners of the last decade the winners of the next 5 to 10 years? And I guess just thinking about AUM and longer term, like where do we go?

I'm just going to say it's too hard a question. I think you have to go business by business a little bit, right? I mean I made the point about direct lending winners sort of being -- I think that's pretty fully baked. Alternative credit, I think we need to be innovative and think about growth in areas that we can continue to build upon what's clearly an attractive kind of first-mover advantage that we have along with some others.

And I guess the last thing I'd say, and I'll leave it to Marc to conclude. But our investors love the idea of having fewer high-quality alternatives managers and you made it at this point. So long as what you're delivering to them is really good, and you made the point, and I'd corroborate, which is we don't want to manage assets for clients where we don't think we're at least top five in that market, right? And can you truly be great at everything, probably not. But to answer your question simply, I think, generally speaking, the folks that are at the top of the industry today, we'll stay there.

Yes, this is the funny other side of the commoditization coin where people tend to think it's pejorative to say, "Yes, but isn't the product kind of getting commoditized?" When you're already one of the leaders, that's not a bad fact because you don't need any more. The leaders have been largely established. The one place where I'd say that's still evolving on the margin is in the wealth channel. And by the way, there, though, leadership is really important because you see the top few products, really all the funds flows. And that's sort of being occupied by different ones of us and other firms. So that maybe still has a little more evolution to go, but I think you have a pretty good guess at who the winners in terms of market share and kind of position as the go-to firm for the most part are going to be.

All right. Great. I think we're a few minutes over. So we'll leave it there. Thank you both for being here. Great perspective, as always, and good luck.

Thank you.

Thanks.

Welcome to the Ares Management Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Monday, November 3, 2025.

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

Good morning, and thank you for joining us today for our third quarter 2025 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 certain 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 these non-GAAP 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 a quarterly dividend of $1.12 per share on our Class A and nonvoting common stock, representing an increase of 20% over our dividend from the same quarter a year ago. The dividend will be paid on December 31, 2025, to holders of record as of December 17. As we have in the past, we expect to announce an increase in our quarterly dividend level beginning with the first quarter of next year.

Now I'll turn the call over to Mike, who will start with some comments on the current market environment and our third quarter financial results.

Thank you, Greg, and good morning. We appreciate you joining us. Ares generated another outstanding quarter of financial results, reflecting the broad-based strength of our investment platform, our leadership in many of the fastest-growing private market segments and the continued strong fund performance that we're providing to our investors.

Our third quarter results included strong year-over-year growth in management fees of 28%, FRE of 39% and realized income of 34%. We raised more than $30 billion of new capital in the quarter, which was our highest quarter on record. Year-to-date, we've raised over $77 billion and over the last 12 months, we've raised over $105 billion, up 24% from $85 billion in the comparable prior year period.

Our gross deployment was even stronger, totaling over $41 billion invested in the quarter, 55% higher than the second quarter and 30% above our previous high in the fourth quarter of last year. As a result, AUM increased to more than $595 billion and fee-paying AUM increased to $368 billion, both up 28% year-over-year. We're experiencing significant growth across nearly every major investment strategy as demand from both institutional and individual investors continues to increase.

Investors are seeking durable income above what they can find in the traded markets as well as differentiated private market solutions in asset classes like infrastructure, real estate, secondaries and global private credit. As a result, based on our continued strong fund performance and the strength and breadth of our fundraising channels, we now expect to meaningfully exceed last year's $93 billion.

We continue to see strong fundamental credit performance and solid growth metrics across our portfolios. Our net realized loss rates remain very low and are consistent with our cumulative average annual loss rate of just 1 basis point that we've generated in our direct lending strategy over the past 2 decades. We're also seeing the transaction market starting to rebound across many of our investment groups and believe that we are well positioned for new deployment opportunities with nearly $150 billion in dry powder. And our firm-wide investment pipeline remains at elevated levels near our record pipeline that we discussed 3 months ago.

Our fundraising continues to benefit from our strong and diverse product lineup of approximately 40 funds in the market. We're seeing continued high demand for our private credit strategies from both institutional and individual investors and accelerating interest in areas outside of private credit.

During the quarter, we held the final close for our third infrastructure secondaries fund. We noted on last quarter's call that we believe the fund would hit its hard cap of $3 billion in the final close. Due to investor demand, we increased the hard cap and closed on $3.3 billion in equity commitments, which resulted in the fund being over 3x larger than its predecessor, including $2 billion in related vehicles, we believe that this $5.3 billion pool of capital is among the largest ever raised in the infrastructure secondaries market.

The market opportunity for deployment is strong and building as GPs seek solutions and LPs seek liquidity. And even with the significant upside in this fund, we estimate that 35% of the fund could be committed by the end of the year. Also in the infrastructure sector, we anticipate additional closings this week, marking the first official close of our sixth infrastructure debt fund, which would bring the total to $5.3 billion in capital, inclusive of related vehicles and leverage with $2 billion raised post quarter end. Notably, the team has already committed $2.5 billion of capital across North America and Europe.

We're seeing significant momentum across our entire infrastructure platform, which includes debt, core and opportunistic equity, data centers and secondaries. Over the past 12 months, including the commitments to infrastructure debt early in the fourth quarter, we've raised over $10 billion across our various infrastructure products.

We had another strong quarter in our credit strategies, raising $19.3 billion with particular strength in our perpetual capital funds. In alternative credit, our open-ended core alternative credit fund raised over $1 billion in its semi-annual subscription on September 30, bringing total AUM in the fund to over $7.4 billion. We believe that this is the largest non-rated asset-based finance fund in the market, and we've now raised 3 out of the 4 largest institutional ABF funds in the non-rated market.

Also at quarter end, over $3.4 billion of LP commitments in Pathfinder II, representing more than half of total fund commitments elected to extend the reinvestment period for another 2 years, providing additional investment capacity for our Pathfinder series. Our leadership position could further widen next year with the launch of our third alternative credit fund in January.

Also within credit, we held the final close for our inaugural specialty healthcare fund with $1.5 billion in total available capital, including anticipated leverage. Within real estate, we're also seeing positive fundraising momentum. Our fifth Japan industrial development fund is targeting a significant first close in the first quarter of 2026, and we anticipate our 11th U.S. value-add real estate fund could hit its hard cap of $2.6 billion in the first part of next year, significantly exceeding the $1.8 billion raised in the prior vintage. We believe our real estate business is benefiting from its strong track record as certain LPs are rotating away from other real estate managers to Ares.

Last week, we also held a final close for ACOF VII, bringing total commitments in the fund to $3.8 billion. The final close was above our most recent expectation as we believe both ACOF VI continued top quartile performance and ACOF VII seed portfolio and strong pipeline provided some late-stage momentum. ACOF VII turned on its management fees on November 1.

As we look to next year, we see continued strong demand for our institutional funds. In addition to the funds in the market I mentioned previously, we anticipate good momentum into the final close for our third special opportunities fund, which has closed on over $5.9 billion, and we expect a number of new funds in market, including our seventh special situations fund in Asia, our 10th real estate secondaries fund and a new large global fund in our digital infrastructure business based upon our global seed portfolio, just to name a few. And in late 2026, there is potential for the launch of our fourth U.S. senior direct lending fund.

The strength of our institutional fundraising this quarter was matched by continued momentum in our wealth business. August marked a new monthly record for equity capital raised across our semi-liquid funds surpassing $2 billion and fueling our highest quarterly equity inflows in our history at $5.4 billion. Year-to-date, through the third quarter, we've raised over $12 billion in gross equity capital in our semi-liquid wealth strategies, up more than 70% year-over-year, and our market share for the third quarter exceeded 10%, ranking us #2 in industry fundraising per industry data.

Our results reflect the enhanced scale, diversity and durability of our global wealth platform. Approximately 40% of third quarter inflows came from outside the U.S., including strong demand from Japan following our first dedicated product launch there. We also saw early momentum in our sports and infrastructure offerings, which are expanding our reach across RIAs and family offices and key geographies such as Canada, the Middle East and Asia Pacific.

The third quarter was also a record fundraising quarter for our diversified non-traded REIT, driven by our industry-leading 1031 Exchange program and the highest quarterly common stock raise in over 2 years. We remain the market leader in the 1031 Exchange space with over 20% market share, and we recently closed on the largest transaction in history, approaching $100 million in size, which underscores our ability to execute complex exchange opportunities at scale.

We continue to see strong inflows this quarter and remain confident in the long-term growth of our wealth business. Just last month, we raised our 2028 AUM target for semi-liquid wealth products from $100 billion to $125 billion, reflecting both our current run rate and the strength of adviser demand across geographies and channels. With 8 semi-liquid products gaining momentum, we believe that we're well positioned to meet evolving investor needs for durable income, diversified equity growth and tax advantaged real asset exposure that can protect against inflation.

Our wealth distribution footprint continues to expand, yet of our 80-plus partnerships, about half currently distribute only one product, highlighting significant white space for multiproduct expansion. We're also deepening engagement across the RIA and IBD channels, where we see meaningful opportunity for private markets adoption. We believe the secular shift toward private markets and wealth portfolios is still in its early innings. Our ability to innovate, deliver strong investment performance and broaden access globally positions us well to lead this transformation.

And now let me say a few words about our market outlook and recent investing activities. Overall, we're excited about the breadth and quality of the opportunities and the positive tone in the market. We're seeing a pickup in underlying activity that should support strong M&A volumes in the fourth quarter and into 2026. Credit markets are open, bankers are reporting stronger new transaction activity and the potential for lower short-term rates should encourage sponsors to take advantage of improved financing conditions. Bid-ask spreads are narrowing as multiples have increased and as financing costs have declined. As a result, we're seeing higher quality companies able to access the markets on acceptable terms.

Historically, declining rates have driven increased deployment activity and accelerated growth in our fee-paying AUM. We're also seeing lower rates benefiting our real estate strategies where valuations are starting to improve, transaction activity is increasing and supply-demand balances are improving, particularly in logistics and multifamily.

We also continue to see robust opportunities to support the energy and data center needs for the digital economy as demand is significantly outstripping supply and data center vacancy is running at historic lows. In the past several weeks, we've announced several very large infrastructure transactions and are drawing on our expertise across the platform to support these attractive investment opportunities.

And lastly, before I turn the call over to Jarrod, I want to provide an update on an important industry initiative that Ares is leading. Last month, Ares and 8 other managers launched a new program called Promote Giving, where all managers committed to donate a portion of select fund performance fees to charitable organizations to support global health, education and other causes. The Ares Pathfinder series of funds has been at the forefront of this initiative. And to date, our funds have already accrued over $45 million in pledged charitable contributions with half coming from employees. This new industry initiative, coupled with the significant growth in and impact of the Ares Charitable Foundation is a testament to the culture of our firm and our core values.

And with that, I'll turn the call over to Jarrod to provide additional details on our financial results. Jarrod?

Thanks, Mike. Good morning, everyone. As Mike stated, our business continued its acceleration in the third quarter with 20-plus percent year-over-year growth in both AUM and FPU, translating into robust management fee and FRE growth and culminating in 25% year-over-year growth in after-tax realized income per share of Class A stock. We see broad-based positive momentum across our businesses as we continue to attract significant capital in the institutional and wealth channels, source differentiated new deployment opportunities and ultimately seek to deliver attractive risk-adjusted investment returns for our investors.

Now let me walk through a summary of our quarterly results. Management fees were a record $971 million, representing a 28% year-over-year increase. Along with the significant final close of our third infrastructure secondaries fund that Mike discussed, we generated $29 million in catch-up fees during the quarter. Excluding all catch-up fees, management fees increased at a 21% annualized rate compared to the second quarter due to the strong net deployment and a 21% annualized run rate increase in FPAUM during the quarter. While we anticipate that catch-up management fees will return to more normalized levels next quarter, the pipeline for new deployment remains elevated.

We have $81 billion of AUM not yet paying fees that is available for future deployment and $4.6 billion of development assets not yet stabilized that could generate over $770 million in additional management fees. Other fees were up modestly over the second quarter, largely due to a small amount of leasing fees from our new Japan data center development fund.

Fee-related performance revenues totaled $85 million in the quarter. The most notable contribution was the annual payment from our open-ended core alternative credit fund. As a reminder, this fund crystallizes FRPR annually in the third quarter for the prior year period. So this year's crystallization represents 2024's AUM and returns. As Mike mentioned, this fund continues to increase its AUM. This gives us good insight into 2026's potential FRPR, which assuming continued performance of the fund has the potential to be larger at this time next year, simply due to the growth in AUM.

As we look to the fourth quarter, we anticipate approximately $125 million in FRPR from the credit group, which would bring total FRPR year-over-year growth to approximately 17%. This anticipated growth reflects the strong net additions in our FRPR eligible funds and solid credit performance, which more than offsets the 100 basis point decline we saw in base rates. I would note that our fourth quarter payments are based on total returns for the year and could be impacted by changes in market values into year-end.

Within real estate, our diversified non-traded REIT is on a trajectory that could enable us to generate a small amount of FRPR in the fourth quarter, assuming continued performance at the current annualized level as the fund is above its high watermark and approaching its 5% hurdle rate. We now believe we're positioned to generate FRPR from our diversified non-traded REIT next year, dependent on the market backdrop and fund performance.

To put the potential FRPR in perspective, hypothetically, if we had started off 2025 at our high watermark and just needed to exceed the 5% annual hurdle, we estimate that the diversified non-traded REIT would have been able to generate approximately $30 million in gross FRPR or about $12 million of net FRPR at the current annualized level. Based on a continuation of its current performance trajectory, our industrial non-traded REIT could also exceed its high watermark in 2026.

Compensation and benefit expenses increased 4.6% quarter-over-quarter, reflecting headcount growth and higher performance expectations, but it increased at a slower rate than our non-Part I management fees, which grew 7.6%. This excludes both Part I and FRPR, which remain at fixed ratios on associated revenues. Excluding supplemental distribution fees, which increased $4 million over the previous quarter due to record fundraising in the wealth channel, G&A expenses also grew at a slower rate than management fees. We expect that G&A expenses should not grow more than 50% to 75% of the rate of management fees on a long-term basis, and we expect continued improvement in that percentage as we scale various strategies.

Fee-related earnings of $471 million for the quarter increased 39% year-over-year. FRE margins totaled 41.4% in the third quarter, up slightly from the second quarter. But as expected, the integration of GCP continued to temporarily compress margins in the third quarter. We expect full year FRE margins to be at or slightly above 2024 levels, including the impact from GCP. Given the expense reductions and growth in revenue we expect in GCP throughout 2026, next year is expected to be a better year for margin expansion, and we expect to be closer to the top end of our 0 to 150 basis point annual margin expansion guidance.

Turning to our performance-related balances. We experienced very strong market appreciation across our investment portfolios this quarter and net accrued performance income on an unconsolidated basis also increased 9.2% to $1.2 billion at the end of the quarter, of which over $1 billion is in European-style waterfall funds, with the remaining $180 million in American-style funds. We currently expect more material amounts of these potential American-style performance fees could be recognized in 2026 and beyond.

With respect to our European-style funds, we continue to expect $500 million in total net realized performance income across 2025 and 2026 combined. From a timing perspective, it is difficult to be precise on the specific quarters, but we anticipate we will see approximately $450 million over the next 5 quarters, including $200 million in Q4 and early Q1 combined. Realized income totaled $456 million for the quarter, a 34% year-over-year increase. During the quarter, our effective tax rate on realized income was 8.6%, which is in line with our range of 8% to 12% for 2025.

As you can see in the earnings presentation, we continue to generate strong performance across our strategies with nearly every composite reporting solid quarterly and annual returns. In credit, our primary strategies have generated double-digit returns ranging from 10% to 23% over the last 12 months. And that strong performance continued in the third quarter.

Quarterly gross returns were 7.2% for our APAC credit strategy, 5.6% for alternative credit, 4.8% for U.S. junior direct lending, 4.2% for opportunistic credit, 2.6% for U.S. senior direct lending and 2.3% for European direct lending. As we've scaled our direct lending funds, we've generally seen performance as good, if not better, than the predecessor fund.

In real estate, we continue to see improvements in rent growth and property values. Our Americas real estate equity composite is up 9.1% on a gross basis over the last 12 months, and our diversified nontraded REIT has generated a net return of 7.9% for the first 9 months of the year. In our secondaries group, APMF continued its strong performance with gross returns of 14.7% over the last 12 months.

I'll now turn the call back to Mike for some concluding remarks.

Thanks, Jarrod. Before wrapping up the call, I want to provide some thoughts about current credit market conditions. Due to several high-profile bankruptcies or instances of fraud in the news, there have been many questions and concerns about what this could mean for a credit cycle and private credit players like Ares. Based upon the strength that we're seeing in our portfolios and what we're hearing from our peers and general credit trends, these events appear to be idiosyncratic and isolated and not the sign of a turn in the credit cycle. From our vantage point, our credit portfolios also remain healthy, and we've not seen any deterioration in credit fundamentals or changes in amendment activity that would indicate a turn in the cycle is coming.

Within corporate credit, over 93% of our credit exposures are senior debt. Our loans on nonaccrual at our publicly traded BDC, Ares Capital Corporation, are 1% at fair value and 1.8% at cost, a decline from the second quarter and 100 basis points below ARCC's historical average. From a fundamental standpoint, we continue to see healthy year-over-year double-digit EBITDA growth across our U.S. direct lending strategies and interest coverage ratios are improving.

Loan-to-value ratios remain conservative and near historic lows at roughly 42% in the U.S. and 48% in Europe. This means that our corporate borrowers would have to lose on average more than 50% of their enterprise value, resulting in a total loss for the private equity sponsor before we lose $1 of our principal.

Within our asset-based finance strategy, we're materially underweight nonresidential consumer assets, which represent less than 5% of our entire ABF portfolio, while the broader industry is closer to 1/3 of their portfolios. Our alternative credit strategy has negligible exposure to subprime consumer assets at less than 1% and its total auto exposure, which is mostly prime, is about 1% of our ABF AUM.

Our nonaccrual rate in alternative credit is essentially 0, and we're not seeing a material change in loss curves relative to our underwritten estimates. Our credit team operates with an open source investment model focused on identifying attractive relative value across different asset classes. This means that we're never forced to invest in any particular subindustry. Over 90% of our investments are either sourced through proprietary channels or via limited processes. These investments are directly structured, allowing us to embed collateral protections using our own downside analysis.

Looking at the bigger picture, we believe that Ares would benefit if a credit cycle were to occur as we have in past cycles. Performing for our investors is always our top priority, and we take pride in our historical track record of performance during previous credit cycles where we've generated higher returns than the peer average and the comparable traded credit markets. This outperformance has enabled us to be front-footed and accelerate our growth during these periods. For example, during the GFC, from the end of 2007 through the end of 2010, ARCC had no aggregate net realized losses for that 3-year period and generated 540 basis points of annual incremental return above the bank loan index with an annualized return of 11.2% over that 3-year period versus a 5.8% annual return for the leveraged loan index.

The combination of higher spreads, credit outperformance and the ability to raise capital from institutional investors during the market dislocation enabled us to increase our management fees at a 27% CAGR. We executed a similar playbook again during 2020 and 2021 through credit outperformance as exemplified by ARCC's lower nonaccruals and net realized losses versus peers. When we combined our credit outperformance with our deployment of our significant dry powder, our management fees at Ares increased again at a 27% CAGR from year-end 2019 through 2021.

We'd expect to see strong growth again if the credit cycle were to turn for a few key reasons. First, typically more than 85% of our annual revenue is generated by management fees and our management fees and fee-related earnings are generally insulated from credit losses. As an asset-light third-party asset manager, we have minimal direct exposure to loans and bonds, and we do not use significant amounts of leverage. At the end of the third quarter, we had a corporate investment portfolio of over $2.6 billion with approximately $331 million in credit assets compared to our $368 billion in fee-paying AUM.

Second, when a credit cycle does occur, investors understand that it is often providing a superior vintage for returns as capital is scarce. For Ares, in every vintage year that was originated during the last 2 recessions from 2008 to 2009 and 2020 to 2022, we generated returns that exceeded our 20-year averages for both our U.S. senior and junior debt loans and nearly all were 100 to 500 basis points better.

In order to outperform, a firm must have capital to invest when others retrench. On that point, Ares possesses among the highest, if not the highest amount of credit dry powder among our peers. Our ability to provide flexible capital and accelerate deployment has been key to our outperformance in previous cycles, along with our deep underwriting processes, significant diversification, strong restructuring teams and emphasis on investing in cycle-resilient businesses and industries. Our experience tells us that the small potential for loss management fees should be more than offset by new management fees from deploying a small portion of capital already raised and not yet paying fees. So maybe now to conclude.

We believe that the credit markets remain healthy and private credit spreads continue to offer meaningfully better risk-adjusted returns relative to traded credit markets, where spreads are near historical tights across investment grade, syndicated bank loans and high yield. Private activity is increasing, spurred by the need for DPI, prospects of lower rates and continued healthy cash flow growth. And when we enter the next credit cycle, we believe that Ares with its balance sheet-light management fee-centric model will be well positioned to outperform and even potentially accelerate growth for the reasons that I cited.

We continue to actively invest in growing and expanding our investment teams across products and geographies. And when combined with our significant fundraising efforts, we're better positioned than ever before to provide a broad range of investment solutions to our investors around the globe. I'm excited to see how 2025 wraps up, and I believe that we have very strong momentum heading into next year.

Finally, we understand that we are now the largest eligible financial company, not in the S&P 500 Index. And when that time comes, we believe that entry would be beneficial to our shareholders. As always, I'm just so proud and grateful for the hard work and dedication of our employees around the globe, and I'm also deeply appreciative of our investors' continuing support for our company.

And I think with that, operator, could you please open the line for questions?

[Operator Instructions] Our first question comes from Alex Blostein with Goldman Sachs.

Lots of good color on credit. So I actually was going to ask you guys something on a different topic, which is about real estate and maybe real assets broadly. It feels like there's a number of green shoots across the real estate market, as you pointed out. So maybe you could expand a little bit how you envision your franchise position in case LP appetite starts to normalize and resume in the real estate channel across both the institutional base as well as your wealth clients.

Thanks, Alex. I think as people know now, our real estate business is global, and I think we are the third largest institutional real estate manager in the market. That gives us many of the benefits of scale that we've experienced over the years in other parts of our business in terms of origination, the ability to invest in portfolio management, access to financing. And I think most importantly, our transformation to a fully vertically integrated platform.

And so when you look at the business today, which, as I think we've talked about before, is largely concentrated in industrials and multifamily as our 2 highest conviction sectors. We now have the ability to develop through to asset manage the entirety of the business, and that's a highly, highly differentiated skill set. As you mentioned, there are tailwinds occurring in real estate. We are coming out of a period of pretty meaningful supply constraint in the market, which has supported values and rent growth across the portfolio. And as we begin to see rates come down, that's usually pretty constructive for real estate transaction volumes.

We're already beginning to see that. If you were to look at our real estate deployment quarter-over-quarter, Q3 versus Q2, we deployed about 51% more than we did last quarter. And if you were to look at year-over-year deployment in real estate around the globe, we're about 78% higher year-on-year. So we're already beginning to see the green shoots materialize. And I think given our position, I think we'll be a pretty big beneficiary of that increased transaction volume.

And we'll go next to Steven Chubak with Wolfe Research.

So I also appreciate the color, Mike, on credit performance trends and the historical perspective. I too am going to ask on a separate topic of fundraising. Just the momentum you've seen is quite impressive, especially given the small contribution from campaign fundraising this past year. So as we look ahead to next year, just given a more meaningful contribution or anticipated contribution in campaign fundraising, the near-record transaction pipeline you cited, how are you thinking about the outlook, especially versus a tough 2025 fundraising comp? And how will that mix of deployment potentially evolve as we look ahead to next year?

Yes. Thanks, Steve. It's a good question. We came into this year giving you all commentary on 2 fronts. One, that we felt given what we saw in the world that we might be able to surpass our prior record of $93 billion. And here we are now after 3 quarters, expressing high conviction that we, in fact, will. That's obviously a function of outstanding underlying performance that's supporting continued investor demand. But I also think it just reflects the continued investment that we're making in our global distribution, both wealth and institutional.

Interestingly, when we came into this year, it was in the absence of the large flagship credit funds that we made the prediction that we could beat our record. And I think what that's demonstrating is the diversity of strategies is actually resonating with investors. We had over 40 funds in the market this year institutionally, and absent the large flagships, we've been able to put forward the type of results that we are.

As I mentioned in the prepared remarks, I think next year, you're going to see us tying up some of our large funds that are currently in the market, opportunistic credit, some of our real estate funds, and then we will give way to some of our flagship credit funds again, like our Pathfinder series and potentially our senior direct lending fund.

Lastly, I would just mention, and it's really the combination of wealth, but also just the way that the product portfolio has transformed to include open-ended funds, SMAs, broad global strategic partnerships, investments in growing our insurance business to name a few, the floor for annual fundraising just continues to be raised year in and year out.

And so unlike 10 years ago, where we saw much more volatility year-over-year, we go into any given year now just with a much higher level of conviction around what that base number could be. So we're pretty excited about next year. Obviously, we'll know more when we get into the year and we see what the market looks like and what our LP allocations are, but we don't expect this to slow down.

We'll go next to Craig Siegenthaler with Bank of America.

Can you guys hear me, okay?

Yes.

Perfect. My question is on the potential for lower yields in private credit, driven mostly by lower base rates. So how do you think investors will react to lower yields if the Fed continues to cut? So could we see softer private credit fundraising if they pivot to other asset classes? Or do you expect some of that record cash and money market funds on the sidelines to provide a new source of flows?

It's a good question, Craig. I would say in terms of investor appetite, and I've talked about this before when we've been in transitioning rate environments that -- the investor appetite for private credit exposures is not an expression of desire for absolute return. It's about relative return relative to the traded alternatives. And when you look at where private credit spreads are, both high-grade and sub-investment grade, they're still offering a significant amount of excess return relative to the loan market, the bond market and the IG market.

If you look at private credit spreads today, they're probably 225 basis points in excess of the traded alternative, and that's kind of right in line with what we've seen historically. If you look at the numbers that are coming through real time in wealth in October and November, we're just not seeing any negative investor reaction to a shift in base rates.

I'd also highlight that if you were to go look at the disclosures in ARCC, the business model is just not that sensitive to a decline in rates. Our historical experience has been that when rates are coming down, 2 things happen. One, credit spreads typically widen, and we've actually seen a modest widening already taking place within the private market. And then two, transaction activity tends to pick up dramatically and deployment increases and fees go up. So when you look at the impact of lower rates generally on the business, it tends to be a net tailwind, not a net headwind.

And we'll go next to Patrick Davitt with Autonomous Research.

Just touching on the point you just made on spread, obviously, had some wobbles in the bank loan market, had some deals pulled and reprice, which theoretically, to your point, I think should be good for direct lending dynamics. So curious if you're seeing any sign that banks are getting more conservative, so potentially less competitive. And through that lens, kind of how the new origination spreads track through 3Q and looking so far in 4Q?

Yes. I think Kort and team did a good job talking about our positioning on the ARCC earnings call, and we've tried as best we can globally to maintain a broad exposure to all parts of the private credit market from lower middle market through to upper nonsponsored/sponsored with really deep industry capabilities, not to mention all of the great work that we do in our ABF business.

And so when we're looking at the bank behavior at the top end of the market, it's just less relevant to us than it is to, I think, other players who haven't made the investments in that core middle market origination. I would say right now, we're not seeing a meaningful pullback in risk appetite, but we are seeing spread moderation in our market. We probably saw 25 basis points of spread widening in the third quarter, and that may persist and continue.

As volumes pick up and the supply/demand in the market gets back to stasis, that's generally a good thing for spreads as well. So even if we're in an environment where banks are still taking risk when transaction volumes pick up, we tend to see more price stability. I think the good news for us is if it happens, we can go in and take share. And if the banks continue to drive volumes into the loan and bond market, obviously, that's a big boon to our liquid credit business, and we tend to participate there. So I've always felt like we were well hedged against that behavior at the upper end of the market.

And we'll move next to Bill Katz with Cowen.

I joined a couple of minutes late, so I apologize if this question is a bit redundant. And maybe just to change topics a little bit. I was wondering if you could give us an update on the GCP transaction. It seems like the integration is going very well from Jarrod's comments on the margin opportunity into next year. But wondering if you could talk a little bit about the growth opportunity, whether it be on the infrastructure side or the real estate side. It seems like still pretty fertile areas as well.

Jarrod, do you want to handle that one?

Bill, great to hear from you. GCP is going very, very well, as I mentioned in my prepared remarks. We're really excited about a number of different phases of that transaction. You highlighted what I mentioned in the prepared remarks around our expense synergies, but you also highlighted there in your question, 2 of the things we're pretty excited about. One is the expansion of the real estate platform. And as Mike mentioned, that took us to one of the 3 largest alternative real estate managers in the marketplace today. That gives us advantages of scale. It's helping us to build out our vertically integrated real estate platform. And it's making us a player globally in a number of different geographies that we didn't have a presence before.

The second piece and probably the most exciting piece is the opportunities in data centers. This is something I've talked to a lot of you about in the past, and we've talked to the market about pretty extensively, but we're very excited with the land that we've banked and the opportunity set that we have there. Not all data centers are necessarily created equal. And what we've looked for and what we've banked are urban adjacent sites that will provide low latency to the -- to those urban centers and be very attractive to cloud computing and be a beneficiary of AI, but not necessarily dependent on AI. So these are really high-quality sites that investors are looking forward to.

And the ability to put them either into single site funds like we did with our Japanese data center or to put them into funds that are co-mingled with a number of different sites in them is really exciting as we see that market demand on the fundraising side for these properties and these high-quality properties and the ability to grow off of that.

Right now, we have about $6 billion in the ground that we're going to be able to develop and manage, and that will be leading our next series of funds. And that's not to mention some of the smaller things around the edges like the self-storage business, which we see meaningful tailwinds and a lot of growth opportunity. So really across the growth front from GCP, it matches the profile of what we're trying to do as a business, which is continue to grow at that 16% to 20% FRE that we set out for you and the 20% plus RI targets that we've set out. And this fits beautifully in that, and we're very excited to have them on board.

And we'll go next to Brennan Hawken with BMO.

I wanted to touch on wealth and fundraising. Mike, you spoke to the floor being higher in fundraising and it looked like you had a nice acceleration on the wealth front. You also spoke to offshore being particularly strong. Was there anything in particular in the quarter that caused the pickup in fundraising on wealth to be particularly noteworthy? Or is this just a building pace that you expect to continue to see strengthen?

Sure. Yes, we're super excited about the progress that we've made in wealth. I think as folks know, we have 8 semiliquid products, all of which are growing nicely. We continue to add distribution partners and deepen our relationships with our existing platform partners as well. It was a very strong quarter, obviously. As you can see, Q4 is shaping up to probably be our second highest quarter on record relative to this quarter. We've seen $1.3 billion of equity in October, another $1.6 billion in November, and then we'll see how December shakes up, but Q4 is shaping up to be a pretty strong quarter.

I would highlight 2 things that probably elevated the Q3 numbers slightly relative to the run rate going into Q4. Number one is we meaningfully launched our efforts in the Japanese market, and we saw a very high demand in Q3 as we onboarded our platform partners there. I think we'll continue to see demand coming out of that market, but we won't get that big pop.

And then two, as some of these new funds are coming online like an ACI or an SME, you tend to see a little bit of front-loaded demand as those funds are getting seeded early in their distribution life cycle. So I think Q4 is going to be really strong. My sense is it's shaping up to be the second highest, but it will probably fall short of Q3 just because of those the few things I mentioned.

And we'll go next to Ken Worthington with JPMorgan.

Can you talk about the acquisition of BlueCove and liquid credit and how it fits into the insurance capabilities and your operations there?

Yes. Thanks, Ken. It's a good question. We didn't talk about this a lot, but Ares started our partnership with BlueCove in 2023. We made a minority investment and began to spend time with the company, took a seat on the company's Board, began to actively collaborate with the platform in our insurance business and our quantitative research group. We watched AUM go from about $1.8 billion to $5.5 billion. And so while still relatively small for Ares, we're seeing some pretty significant growth in demand. I think this is a very interesting complement to our existing actively managed loan and bond business.

And they have a very interesting systematic IG capability, which, to your specific question, I think, will be a meaningful value add to our affiliated insurance platform as well as our third-party clients. Our expectation is that the full acquisition will close in Q1, but that you're going to begin to see meaningful synergies as we introduce our global investor base to their capability sets that we're super excited about them.

We'll go next to Michael Cyprys with Morgan Stanley.

I wanted to ask about asset-based finance, big market opportunity, but comprised of many different types of assets, as you noted, including some smaller niche areas. I was hoping if you could talk about how you go after this market opportunity in scale and talk about how you're expanding your sourcing funnel from partnerships to flow agreements, acquisitions and how that sourcing funnel might evolve and look 3 to 5 years from now as compared to today?

Yes, I appreciate the question. Look, we've got one of the largest, if not largest, businesses in the non-rated part of the market. And as we've talked about, we just feel that the opportunity to lead there gives us high profit, high margin, really durable alpha and the ability to deliver differentiated performance to our investors. That's not to say that we're not focused on the IG part of the market, about 50% of our business continues to be in the rated side of the business, but we think that we need to be balanced between the IG and the non-IG part of the market.

Depending on where we are, that's obviously going to drive sourcing differently. We have close to 100 people in that business now. They are doing everything from calling directly on specialty finance companies and aggregators, building relationships with banks to have flow agreements across the asset waterfront and in some instances, acquiring minority or control positions in asset aggregation platforms themselves. Unlike some of our peers, we've probably been less focused exclusively on platform acquisition. We've done it, but it's not the core way that we're thinking about sourcing.

I think we'll continue to do it in situations where we see durable demand from our clients for a certain asset type where we think that we want to lock in flow. I think the bank conversation is continuing. The combination of SRTs, portfolio purchases and forward flow agreements continues to be a big driver of deployment there. And when you look at the gross deployment trends in the business, we're just seeing a significant uptick as we head into the end of the year.

If you look at Q3 versus Q2, we had nearly doubled the deployment in that part of the business. And if you look year-over-year, it's well in excess of 30% and the pipeline in that business, particularly going into Q4 and Q1 is significant. So I think the momentum continues. And as I mentioned, we'll be coming into the market with our next vintage fund early in the new year.

We'll go next to Ben Budish with Barclays.

I was wondering if you could unpack the deployment in the quarter a little bit more. I think the sequential step-up was quite a bit larger than I think a lot of folks expected. You talked about the pipeline sort of remaining near your all-time highs. Was there anything that stood out this quarter? Should this be a number that is repeatable in upcoming quarters? You talked about again, a very robust pipeline, a lot of opportunities in the next few quarters. But just curious, if anything stood out, anything unusual that may not be repeatable in the near term?

Yes. No, I don't think there's anything special other than as we've talked about. The transaction market is coming back to life. It's a combination of just strong economic fundamentals, decline in rates or at least a forward trajectory of declining rates and a general pro-business deregulatory tone coming out of the current administration and I think is bringing capital into the market. What I've been so pleased with, if you look at the deployment, it's been very broad-based across each of our businesses. We don't have one asset class or one geography that's really driving the deployment. There have been quarters in prior years where we've seen, for example, direct lending, carrying a significant amount of weight, but when you look at the distribution of the deployment, it is very broad-based, and I would expect that to continue.

Our next question comes from Brian McKenna with Citizens.

So you had a great outcome in the quarter for a direct lending portfolio company. It was actually an underperforming asset that was previously on nonaccrual status. The investment got restructured, became an equity owner. You actually sold it in the quarter for $260 million and generated a 15% IRR on the investment. That's probably more than what you would have generated if the loan had performed. So how critical is your portfolio management and workout capabilities to get outcomes like this? And then can you just remind us of historical recovery rates within your direct lending business?

Sure. I'm glad you highlighted because, again, when we spend time talking about how you create value, we're trying to anchor people on the loan-to-value statistics within the portfolio. And the reason that's so important, and this is a perfect example is if you were sitting in a capital structure at 40% loan-to-value and they're 60% of the equity below you, that gives you a significant amount of optionality to capture or recapture all or a portion of that equity value when a company or an asset underperforms. And if you go back and look at our 30-year history, we've actually had 100 basis points plus of positive impact to our returns because of that phenomenon.

Now in order to do that, to your question, you need very deep, very experienced portfolio management and restructuring teams. I think we probably have the largest capability in the market. Last I checked directionally, we probably have 65 people doing that business in the U.S. and maybe 35 or 40 people doing that business in Europe. So our portfolio management team is probably larger than most people's entire teams that are competing with us in private credit. I think this is going to be critical, you're going to see dispersion of return when we hit a cycle.

In order to capture this upside, you need not just portfolio management capability, but you need dry powder. And so as we've talked about, we're always making sure that we're going into any potential cycle with enough liquidity to actually capture that option value. In terms of recovery rates, if you were to look historically U.S. direct lending, and we look at this kind of on an MoIC, meaning front to back, what did I recover? It's about $0.93 -- 93% in U.S. direct lending and 95% in European direct lending.

And we'll go next to Brian Bedell with Deutsche Bank.

Maybe just to come back to the comments you had at the opening, Mike, about the credit cycle and the idiosyncratic instances of fraud. We have had a few just in a very short time frame in the industry. Do you think there's anything structurally going on in the industry aside from a credit cycle that is creating these fraud events? And is this something that could be a concern for retail investors? I guess what kind of questions are you getting from your financial adviser partners regarding this?

Yes, it's a good question. To be honest with you, it's a little bit of a head scratcher because everything that we're seeing tells an opposite story. And when you look at bank earnings, when you look at the top 5 banks in the country, they showed no meaningful increase in loan loss reserves. When you look at the card companies, you're not seeing any meaningful pickups or spikes in delinquencies and charge-offs. So there's this kind of growing narrative about credit concern. But when you look at all of the data from the largest pools of capital, it just -- you're just not seeing it. So it is altogether possible that it's just idiosyncratic and coincidental. And I think we have to allow for that possibility.

The other thing, and it's just -- it is possible that as the cycle progresses and deal flow is picking up, you have a lot of people that kind of want to participate in the growth in private credit. And it is altogether possible that some of the smaller players or new entrants or the banks are taking risks or distributing risks that otherwise wouldn't be taken by some of the incumbents.

If you look at our ABF business, for example, we have a list of things that we think are always interesting, sometimes interesting and never interesting and trade finance is kind of at the very top of the list of things that we just categorically avoid for some of these reasons just in terms of collateral monitoring and the opportunities for fraud. So it could be a little bit of just an indication that there's growth in the sector and people are looking for ways to compete and maybe taking risk they shouldn't or taking risk that they don't understand. But I don't think that, that is a read across to the industry. And I think that's important.

This industry is fairly well concentrated in the hands of the largest platforms, 65% and growing of the assets that get raised and deployed are in the hands of the large incumbents that I think are focused on the right types of risks and the right types of structures. And so when you see these types of things pop up, obviously, it's noteworthy. It's getting a lot of attention, but I just don't -- I don't see anything in our numbers or the adjacent numbers that we see that would indicate that it's anything more than kind of coincidental at this point.

Thank you. I will now turn the call back to Mr. Arougheti for any closing remarks.

I don't have any other than we're obviously really excited with the performance that we had this quarter. The momentum in the business continues, and we're looking forward to giving you all the update on our Q4 performance on next earnings call. So thanks for joining us today.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available through December 3, 2025, to domestic callers by dialing 1(800) 839-4992 and to international callers by dialing 1 (402) 220-2686. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.

All right. Good morning, everyone. Welcome to our next session on our second day here at our financials conference. I'm Ben Budish. I cover the U.S. brokers, asset managers and exchanges, and I'm really delighted to have Mike Arougheti, CEO of Ares. Mike, thanks so much for being here.

Thanks for having me. Appreciate it.

Maybe just to kick it off, talk about how you currently see the macro backdrop. What are you seeing in terms of credit quality, deployment opportunities? How do you feel about activities in the back half of the year and into '26?

Yes, maybe macroeconomic first. I think the good news about our platform, we have a lot of data points that come in from our global real assets and credit book. We have investments in probably over 3,000 middle-market companies. 500 million-plus square feet of industrial logistics, real estate. We got to see the global supply chain moving around. I think despite some of the recent anxiety about softening the labor market, everything that we're seeing in our portfolio would say that the economy is on stable footing and resilient.

We're seeing high occupancy rates in our real estate book, NOI growth in our credit portfolios, nonaccruals remain well below historical averages. We're seeing 12% to 13% year-over-year EBITDA growth, increases in interest coverage. So not to say that we don't share some of the concern just about the forward trajectory for the economy, given what we're seeing in the labor market. But as we sit here today, we're feeling really good.

In terms of deployment on our second quarter earnings call, we articulated a view that we expected deal activity to pick up meaningfully in the back half of the year, and that was already beginning to show itself in the pipelines that we were seeing across the platform. That momentum has continued. So deployment trends are strong, and we think likely to strengthen, particularly if we get a rate cut in the back half.

Great. Maybe digging into direct lending. We've had several years of rapid growth. How would you characterize the state of that market today, touch on maybe the competitive dynamics with the leveraged loan and high-yield markets. Do you think there's more room for private credit in general to take share? How do you think about medium to longer-term growth for that industry and for Ares specifically?

Direct lending, not private credit, just direct lending specifically?

Yes.

I think there's a misconception that direct lending is mature and kind of that its best days are behind it. I don't share that view. I think if you look at the growth of direct lending, just numerically, over the last 10 years, the direct lending market has grown about 14.4%. Private equity market has grown about 12.8%. If you take out the last couple of years, where you've seen a moderation in private equity growth private credits just actually grown in line with private equity market, which is what you would expect.

If you look at frequent numbers looking forward over the next 5 or 6 years, what it will show is that there's an expectation that private equity will actually outpace private credit by 200 or 300 basis points as well secondaries. And I think that's a reflection of an opening up of the liquidity in the regular way private equity business. That said, we have not seen a meaningful change in the competitive landscape. Part of that, I think, is the fact that we're one of the market leaders.

We have a number of scale advantages that allow us to originate even when deal volumes are down.

So you've seen, for example, over the last 2 years, which have been some of the slowest M&A years that we've seen in a long time, our FP AUM was up 30% year-on-year, 2 years in a row. So direct lending, while it's "matured," it's also broadened in terms of the scale of the market that it's able to participate and the innovation and flexibility of the solutions that we can bring into the market, and it's also consolidated.

And so if you look at both capital raising and capital deployment, the larger are getting larger, and we just haven't really seen any meaningful new entrants into the market in 10 to 15 years. Based on our deployment that we're seeing this year, we're still on trend for that meaningful growth that we've enjoyed. So I think there's a little bit of a misplaced anxiety about competitive dynamics.

The other thing that we've tried to do, and we've talked about this before, is make sure that we're covering the broad waterfront of the direct lending market around the globe, U.S., Europe and Asia Pacific, which means deploying large teams in multiple markets and protecting what I would call the lower and core part of the market. So I think some of the misperception is driven by the fact that some of our peers are focusing on larger transactions and are competing head to head with the broadly syndicated loan in high-yield market.

And so there's this push and pull, give and take between those markets. When those markets are active, if you're exclusively focused on large sponsor-led transactions in direct lending, you may see more volatility in deployment, but that's not really where we're putting our primary focus.

Got it. Maybe just in terms of deployment, it sounds pretty optimistic for the back half of the year. Where have you been more active, investing themes...

It's been -- this is -- it's -- for a number of years, we've been saying this and it's -- so I guess it's not so novel anymore. But normally, when we're going through market transitions, either rate transitions or rolling recoveries and recessions, you see different parts of the portfolio disproportionately deployed. For the last number of years, our deployment has been led primarily by U.S. and European direct lending.

But over the last couple of years, we've seen a meaningful increase in places like secondaries, opportunistic credit, real assets credit, asset-based finance. And so while U.S. and European direct lending, just given the size of those markets and the size of those businesses for us, we'll continue to be leading the way. We've just seen a very broad-based increase in deployment. The only place where you haven't really seen it reflecting some of the liquidity challenges in the market is in the regular way private equity business. So I think our secondaries business and our opportunistic credit businesses have been meaningful beneficiaries of the slowdown in private equity.

Another kind of competitive question, you sort of alluded to this a little bit earlier, but just maybe thinking more about the market, as more and more of your competitors are trying to stand up direct lending businesses, what does that mean for returns, especially with deal activity generally being more muted? Is competition starting to eat away at spreads? And are there any implications for investor appetite? I would expect the answer to that second question is no, just based on your recent results, but how do you think about that?

Well, I have a long-standing view that credit spreads respond first and foremost to credit risk, real credit risk. And so a lot of people are expecting credit spreads to be in a different place, but the reality is, I think, most direct lending portfolios are quite clean. And so seeing spreads tighten over the last 18 to 24 months should not surprise people. I think that's more a reflection of just credit quality as opposed to competition. If you look historically at the direct lending product relative to broadly syndicated loan comparables, there's typically 150 to 300 basis points of excess return in the direct lending instrument, and it fluctuates.

Right now, if you look at the public data versus the private data, that excess return is about 225 basis points of excess spread still available in the direct lending market. So the reason we have not seen a decline in private credit appetite, at least at Ares is, people are buying the excess return, they're not buying the absolute return. And so as long as you're preserving that excess spread, you're going to see investor demand shifting away from traditional fixed income into private credit.

Private credit also gives you the ability to deploy into the incumbent book more consistently than the public market. So it's less new deal dependent. And so I think for folks who are focused on not just the excess return, but the consistency of putting capital to work, private credit is a pretty good place to be. Yes, so I -- we don't see anything that would change that. The other thing to keep in mind, too, which is why I think the asset class is attractive investor demand, the way that it has is, spread is only one component of the total return, right?

You have your base rate, your spread, fees, call protection and kind of all things in between over the life cycle of a loan. And so it's not -- it's -- unlike the public markets weren't coming in and out of it with a view that spreads are here, I like it. Spreads tightened 50 basis points or widened because they're floating rate short-term instruments. And so you're generally targeting the same type of return expectation through a different combination of underlying spread plus fee.

Okay. Maybe sticking under this direct lending, private credit umbrella. Thinking about your wealth channel, one of the questions we get a lot is, how do you manage this sort of inherent conflict between retail, which earns fees immediately and institutions, the drawdown funds, which earn fees on deployment. How does this play out between, say, like ARCC and ASIF versus your drawdown in direct lending funds?

Yes, there's a couple of things in there. One, there's no real conflict, right? So the conflict would be if you were somehow I guess, what you're implying, you're allocating to one fund in favor of another because of a different fee construct. The way that we handle that is we just basically allocate transactions according to available capital. And I think people probably know the SEC has given exemptive relief for ARCC to actually co-invest with other funds within the Ares family. So there's no actual conflict, but there's a huge opportunity if you get a balance of funds in retail and institutional. It's interesting.

We started our direct lending business in 2004 at Ares solely being in the public market through ARCC, and we're maybe "late" to the wealth channel. The second thing we did was raise very large institutional commingled funds, and then we finally got around to putting product in the wealth channel with a lot of success. And the reason we did it that way is we think it's critically important that you have the right balance of dry powder to investable market. And the only way that you can actually keep that tension and navigate a cycle is with drawdown funds.

So the thing you like about the wealth channel is, you have perpetual offer funds, but they're procyclical. So when the market is overheating, you see a lot of capital inflows at a time when maybe you should be reducing the rate of investment. And then when capital markets start to weaken, you see outflows or slowed inflows and you don't have enough dry powder to capture that market opportunity. So we've always believed that you have to have a broad diverse set of distribution channels that give you that dry powder to play in the market and support your origination engine and to support the volatility of those retail flows. So we're pretty balanced in the way that we think about it. So I don't really view it as a conflict. I think that they're symbiotic.

Great. Another higher level private credit question, another sort of risk that we hear about, see in the media, is the risk -- whether it's the riskiness of the loans themselves or the risk to the broader financial system. It sounds like from your prior comments, pretty confident in Ares private credit, in particular. But how do you think about that sort of broader structural risk that is often mentioned? And maybe talk about some of the high-level KPIs people may be worried about PIK utilization, LTVs.

Yes, I -- this -- I try to -- I'm pinching my thigh when you're asking me that question. I just -- I've been in this business for 30 years. And from day 1, there's always this overarching narrative that private credit risk is the canary in the coal mine or private -- and that just shows a complete misunderstanding of what private credit is and the role that it plays in the real economy. If someone is worried about real losses in the private credit market, you burn through trillions of dollars of exposure in the private equity market, which probably also means that the public equity markets are hemorrhaging as are the liquid fixed income markets.

There's a total misperception that the companies that borrow in the private credit markets are riskier than companies that borrow in the bank market or elsewhere, and that's just fundamentally not true. And so all we can do is keep performing through cycles and demonstrate that. I think our bank partners understand that because they're obviously meaningful lenders to our portfolios. But the KPIs, just to your point, if you look at Ares' corporate credit book, right now, the U.S. loan book sits at about 43% loan-to-value. So that means that there's cash equity below our exposure of 57%. Our European credit book sits at roughly 49% loan to value.

So there's roughly 51% equity cushion below us. As you can appreciate, if you're a private equity firm and you have 57% of a capital structure in cash equity below a senior secured loan, even if there's deterioration in company performance, there's a long way to go before that 43% is impaired, and you're going to do a lot of things to defend that equity position to prevent the 43% lender from owning your company. That is probably the single biggest risk mitigant in the asset class and probably the one thing that people don't really have a handle on is just how much equity subordination exists in the private credit market today.

Another way to look at that, which is important because it also is driving what we're seeing in the secondary market, the opportunistic credit market and the buyout market. If you look at private equity today, there's about $3.2 trillion of equity invested in current portfolios relative to about $1.2 trillion uninvested. So if you think about the financial incentives of a private equity owner, that 57% index across the entire market represents 3x the capital opportunity that you have as an asset manager within private equity. So you're incentivized not just to maximize value, but you have a disproportionate amount of your capital tied up in these capital structures, which are pretty over-equitized.

Other things to look at would be interest coverage, which is just a measure of EBITDA to interest expense. That's 2x right now and growing, so in a very healthy place. As I mentioned earlier, at least in our portfolios, we're seeing EBITDA growth of about 12% to 13% period-over-period year-on-year. Leverage, just to understand that 50% loan-to-value, leverage is about 5.6x debt-to-EBITDA in the U.S. book, which may seem like a lot, but that basically means that the company is trading at 12x EBITDA and you're roughly half the capital stack. Nonaccruals, as I mentioned, are hovering near all-time lows.

And PIK, again, I think, it's something that is often talked about that's pay-in-kind interest. Not all PIK is the same and not all PIK is bad. So there are a number of ways that PIK finds its way into a direct lending portfolio. The first is at underwriting of a new loan, particularly when interest rates are elevated, the highest quality borrowers that theoretically could attract the highest amount of borrowing may ask you as a lender to have a PIK component to reduce their debt service requirement so that they can have enough cash flow to invest in growth.

For the right companies, we view that as a healthy phenomenon because the idea of putting leverage on a company isn't to constrain growth, it's to help them grow. The second place that it shows up is in structures called PIK toggles, which have become pretty commonplace in the broadly syndicated loan market and have found their way into the private markets. Again, for high-quality borrowers, that's kind of an accommodation to allow a leverage company to navigate its business plan. Generally speaking, if structured the right way with the right companies, it's a win-win because when you pick toggle, the lender makes more money and the borrower gets more flexibility.

So we have a high willingness to do that for the right companies and the right sponsors because we make more rate of return for the same credit exposure. And then the third place where it shows up, which is probably the lowest percentage of PIK in the market, but the one that I think is drawing attention is, when you have a company that is underperforming. And by dint of the fact that it's underperforming, not that rates are high, it can't meet its cash interest requirements, and that's when you get into a discussion between the lender and the borrower about ability to pay.

And similar to PIK toggle, when you put in an amendment in a situation like that, the interest rate goes up. So you may be in an 8% loan, all cash. The rate of interest could go up to 11% or 12%, but the cash will come down to 5% or 6%. So that's going to show a huge increase in PIK. But what's not being talked about is the incremental 200, 300, 400 basis points of return that you're getting at the top half of the capital structure to allow this company to grow in a high rate environment. That third part is a very small portion of the PIK in our portfolios, and I mentioned it's probably the smallest component of PIK in the market.

But even when you're doing it there because of that loan-to-value that we keep anchoring on, if you're adding PIK exposure at 43% loan-to-value, even in a modestly underperforming company, you're effectively just eating away at equity return. So I don't want to say it's completely overblown, but it's largely overblown. And I just think it's getting a disproportionate amount of attention relative to what it actually means in terms of the rate environment and navigating higher rates.

Maybe switching gears a little bit, thinking a little bit about go-to-market and private creation. We've seen a number of your competitors going to market with partners, offering public-private partnership strategies. What are your thoughts here? Is this something Ares is considering working on? And if no, why not?

Well, our whole company is built on partnerships, internal partnerships, partnerships with banks, insurance companies. We sub-advise a number of portfolios for other wealth managers and liquid fixed income portfolios. So the idea of partnership to us is not novel. So again, I think the market is talking a lot about these things under this idea that liquid and illiquid markets are converging or that investor demand is pulling the market in that way. And I'm totally open-minded to that, which is to say if marrying an Ares product with a non-Ares product, in a way that is good for the customer.

Either because they get a better client experience or they get a differentiated investment outcome or a lower fee, which we don't love, but that's part of it, then I could see that having a lot of merit. If the idea is take a great Ares product, marry it with a commoditized liquid product and somehow that enhances our distribution, we don't have a ton of interest in that. And the reason being, we have a big core business already in the wealth channel. We're seeing 150% year-over-year growth with the products that we have. Retail and institutional investors now have multiple access points to invest in Ares products.

So we're not feeling distribution starved in that respect. So I think our primary focus continues to be on driving the core business. Because of the success that we're having in wealth and because of the product diversity that we have there, if the market continues to ask for partnerships, then we'll be there with those partnerships to deliver the product to the client in the way that they want it. But I have yet to see that being a primary demand driver. So I'm taking it slow.

Let's switch gears again and talk about ABF. This is one of the newer themes in the private credit world, but Ares has been doing this for quite some time. So maybe just to start, to level set, talk about your current business here. What exactly is Ares doing in the ABF space? And maybe just remind us what are the key components of the medium-term targets laid out at your Investor Day last year?

Sure. So ABF, asset-based finance, we've been in that business for over 20 years. The business itself has gone through probably 2 or 3 moments of transformation, and we're in one of them now. I think the first big shift was post-GFC, which is when we really started to innovate around how to scale capital and capability in this market. Post-GFC, you saw effectively a dismantling of the securitization, commercial paper and specialty finance apparatus on the street, and it got distributed deeper into smaller specialty finance companies in the private markets.

We began to accumulate capital to invest into that market and had one epiphany, I think, earlier than most, which was at that point in time, the institutional investor community that wanted to access asset-based finance was doing it through very small managers in very small funds in single asset classes. So someone is doing premium finance, someone's doing container leasing, someone's doing cell towers. But if you're an institutional investor, it was very hard for you to put capital to work at any scale and with any consistency because the challenge of investing in these markets, they're fairly cyclical in some cases and sometimes they're really attractive, sometimes they're not.

Sometimes you want to be a lender to a portfolio of these assets, sometimes you want to be an owner. And the institutional investor did not have the ability to navigate. So we conceived an idea under what we now call our Pathfinder funds to go to the market with a broad-based multi-industry, multi-asset class approach to asset-based finance. And it took a while to educate the market on what that would deliver in terms of outcomes. And mind you, at the time, people were still reeling from the GFC. And so when you were talking about things like securitization and structure, you had a lot of CIOs and investment committees who just didn't want to pay attention to it.

Once we got through that missionary work and demonstrated that if you were to just look at the cash flows, they all look the same. And so having the ability to move between different markets and navigate the cycle was hugely valuable, and that has now become a very large business for us. Our business today is approaching $50 billion of AUM, about $47 billion. It's been growing very, very quickly. About half of that is in this non-rated part of the market, where I think we are the market leader in terms of people and capital and capability. We have about 85 investment teams that cover the broad waterfront of ABF.

And then about half of our business is rated liquid or semi-liquid ABS. And the business has largely been growing 50-50 for quite some time. It's been growing at a roughly 40% compound annual growth rate for the last 5 years. At our Investor Day, since you asked, we put forward a target that we would get to $70 billion in that business by 2028, which if you went backwards, is roughly a 17% CAGR from where we are today. So roughly half the growth that we've been enjoying. So we've put the guidance out there, but if we continue to grow at the rate that we've grown accustomed to, then I think we can do better than that.

The last thing, the second wave of transformation, which I think is why it's getting so much attention now is as insurance has begun to converge with alternative asset management, what used to be a largely non-rated sub-investment-grade business, which is where we got our start, is now giving way to a large opportunity in high-grade fixed income. And so all of the rated note tranches that support the private securitization market are now open to invest in through alternative managers and through insurance companies, and that's a big TAM, which is where I think a lot of the enthusiasm is coming from.

And where would you say LPs are currently in terms of ABF? There's a lot of education required? Do they think about it as private credit, but maybe there's a need for more nuanced understanding? Or do you feel like you're kind of...

I think we're still in the early innings. I think the more sophisticated investors have now understood it because they can see folks like us who have raised large funds and deployed them well and been through different rate and economic cycles and now understand it. There's still a fairly healthy level of skepticism candidly just because it looks complicated. There's a lot of complexity in the structure, but it's good old-fashioned private credit exposure. Insurance companies obviously have a very strong bid for high-grade ABF exposure. And I think that's a big driver of the business.

We're trying to stay balanced in the way that we think about it in terms of the high-grade versus non-rated tranche because I think there's real value to being able to originate at every level of the capital structure. And if you over-index to one, you may lose the opportunity in the others and maybe telling people what they know. In the non-rated tranches, that is good old-fashioned 2 in 20 high alpha generative capital. And so $25 billion, $30 billion of non-rated in open-ended vehicles is significantly more profitable and valuable than $200 billion in high grade. And so we're trying to find the right balance in terms of driving the margin of the company.

Maybe segueing into GCP, your latest acquisition. And this expands your presence in Asia, gets you deeper in infrastructure. On the last earnings call, you talked about significant future FRE contributions, particularly as you scale the data center business. So can you talk about that path forward? Clearly, it's a very large opportunity, but where are you sourcing flows? Where are you finding opportunities to deploy? How does the integration look with the rest of Ares?

Yes. I mean, it's -- we're still within the first year, but the integration is going extremely well. Jarrod talked about this on our earnings call. Pace of integration is in line with the underwriting, if not better. I think we've been positively, I don't want to say surprised, but the fundraising front has been a bright spot in terms of the pace with which we're raising capital in both the data center business and the regular way industrial development business. What came with GCP, which was quite unique, was a global data center pipeline and a team of roughly 70 professionals that were exclusively focused on data center development around the world.

In that pipeline, we have meaningful projects that are totaling about, gosh, 1.5 gigawatts in Tokyo, Osaka, London, Sao Paulo. And those are all in various phases of leasing and development. I think the positive news that we put into the market was in our first data center fund in Japan, which came shortly after closing, we raised about $2.4 billion of new capital onto the platform for roughly 240 megs of data center development. So if you just look at the total pipeline and you say that it was 240 megs against 1.4 gig, that would imply that we have $6 billion or $7 billion of capital available to raise in fund format just on the projects that are deep in development that we acquired.

And so we're quite optimistic about that. And obviously, Ares has a very meaningful business in renewable power, energy transition and are one of the longest-standing owners and operators of large-format nat gas-fired power plants. We're a big owner of a nuclear SMR business called X-energy. So there's a lot that's happening at Ares around the peripheries of the data center business as well, not just core data center development, but all the things that you need to have in order to really get these done at scale.

Okay. One of the other newer opportunities that comes with GCP, and I think you alluded to this, but it's the sort of leasing development and property management fees. Can you unpack a little bit what does GCP do that's different from Ares? And what does that sort of opportunity look like to maybe do more of that?

Yes. So the GCP is -- well, I'd say, Ares has been transforming its real assets business over the last 7 or 8 years to be what we would describe as fully vertically integrated. And what we mean by that is we want to develop, own and operate our own assets as opposed to most institutional real asset investors that are partnering with other development and operating partners to buy assets either in development or as they transition to core. And we want to do that for 2 main reasons: One, asset scarcity is ultimately the challenge in these markets. And so as we continue to open up new channels of distribution to raise capital, the binding constraint to growth and market share gain is, can you originate assets.

And so in real estate and infra, if you can build large vertically integrated platforms, you can actually create your own assets, which is a huge competitive advantage. And we're already seeing that in terms of the share gains that we get through development versus acquisition only. And then to your question about fees, when you start to do that, you begin to introduce a number of fees that are accretive to your core FRE or your core management fee EBITDA. And those include development fees, which get paid throughout the entire construction life cycle of these projects, whether they're warehouses or data centers, property management fees, which come once those projects are stabilized and operating and then leasing fees.

And each of those are pretty meaningful. If you weren't as broad-based as we were, I think they would show up in the P&L lumpier than people are used to. But I think given the consistency of the development pipeline that we have, I think over time, particularly as we integrate the GCP logistics and data center business, you'll see a much more consistent exposure to those types of fees coming into the P&L.

Great. Maybe switching gears again, talk about insurance and retirement. Maybe just to start, we've talked about a couple of hot topics. Another one is the opening up of the 401(k) market. How do you see Ares positioned here? How significant might this be? And just for -- to level set investor expectations, when -- hard to say when, but when could we start seeing flows here?

Yes. Look, I think there's a lot of enthusiasm about the opportunity for further democratized access to alts, whether that's through wealth, which we already talked about or through the defined contribution market. There are a number of hurdles that still exist to see that market open up fully. I think there's excitement now because we've had an executive order that has come out in support of increased private market exposures in 401(k)s, but we have not really seen regulatory or legislative action that would further open those markets up. And the reason that, that's so important, the challenges in the past have been that plan sponsors have a very narrow view of their fiduciary duty to their client, largely around fees, not returns net of fees.

So if you look at that market, it is a very fee-sensitive market, largely focused on passive investing. And when plan sponsors have pushed to take a little bit more risk and pay more fee to get access to higher risk and higher return product, there have been pretty significant lawsuits. And so you kind of have a plan sponsor community that has been trained to be risk averse because of the threat of litigation. And so I think it is critically important that we get some kind of regulatory and legislative relief if we really want to see that market open. And I think that is going to ultimately dictate the timing.

Two is even if we get all of that, you're going to have to get to a place where the market is in balance where we can deliver what is typically high rate, high fee product into a lower return, low fee product and have that equation makes sense for the investor. And if you look at the entire target date market and you said we're going to take 10% of that and put it into private markets, there's going to be a fee that will clear. And I think folks like Ares and others are going to have to look at that fee and the size of that distribution opportunity and evaluate whether the math makes sense.

And nobody really knows yet because we don't know what the behavior is going to be. But more importantly, you're going to have to go back and amend all of the existing product if you actually wanted to put it into the existing product. So as you're seeing with people who are starting to dip their toe in the water, ourselves included, most is focused on new product introduction because the administrative burden of going back and renegotiating all of your existing fee agreements with all of your existing sponsors is pretty cumbersome relative to what the opportunity likely will be. So I think you'll begin to see people like us putting product that's tailored for this market into the market with large plan sponsors and small.

You'll see tie-ups like we saw with T. Rowe and Goldman to try to explore investor appetite. But I think that the real gating item is going to be this regulatory legislative relief piece. And then not to go on too much about this, but I think it's important is, it is also possible, if not likely, that the way that this market actually develops because it's the way that the entire retirement services business really works is rather than having exclusive tie-ups within this channel between large traditional managers and alt managers and exclusive relationships that it moves to an open architecture world where you have private markets exposures, in-model portfolios and off-the-shelf options on some of the large platforms.

And if that's the way the world develops, then these exclusive tie-ups that everyone is anxious about become less important, in some cases, less relevant and in certain cases, maybe even restrictive, right, because you're not giving your clients the broadest possible access in a world where they're looking for that balance of return and fee. So there's a lot to work out. We're really excited about it, but we're also pretty measured in our enthusiasm because this is not going to happen overnight and a lot needs to get clarified before these markets open up in earnest.

Great. Maybe with just the last little bit of time here, would love to touch on secondaries. That business at Ares has grown rapidly over the last several years since you acquired Landmark. What would you say has gone well here? And as you think about the product lineup, where to see the opportunities for more meaningful scaling up of that business?

Yes. Look, we're really proud of what we've done with Landmark. We bought the business in, gosh, 4.5 years ago. It had about $20 billion of AUM. Last reported AUM was $34 billion, $35 billion. We've roughly doubled our profit contribution from that business, and we've transformed the product set. Maybe just to step back because I think it's important as we think about how we identify acquisitions. We had a view because we were seeing it both as a GP and an investor into these markets, a transformational inflection point in secondaries. And this is probably 6 or 7 years ago, and it was along the lines of GP-led secondaries.

We're taking market share from LP-led secondaries. Primary market in non-private equity, i.e., real estate, infra and credit was growing and deepening to a level where secondaries would have to become more relevant. And third, product adoption was globalizing whereas it used to be the purview of kind of large U.S. state plans. We're beginning to see just much broader adoption around the globe. So we actually went out and looked for a scaled secondaries platform to buy and identified Landmark, bought it well at a good price with a lot of technology, a lot of capability and track record.

Since the time that we bought it, we started a de novo credit secondaries business, and I think have gone from a world where that market didn't exist to now leading that market, and that is an accelerating part of the business. We have meaningfully scaled our real estate and infrastructure platforms, and you're seeing that reflected in the fundraising in those 2 parts of the business. We've retooled the product set within our private equity business to focus more heavily on the GP-led opportunity in the market, which is now capturing a significant portion of the flows and deployment. And we launched a wealth product about 6 months after the acquisition in a product called APMF, which is growing consistently and is a big differentiated product.

So we've done a lot. The investment thesis has borne out in spades. And we also caught a little bit of a break in terms of the growth in that business because the illiquidity right now in the private equity market is just accelerating deployment there. But with all that growth, the market is still capital constrained. So if you look at annual deployment in the secondaries market, people will tell you we'll do roughly $200 billion of market activity and dry powder broadly in that market is about $250 billion to $270 billion.

So for all of the growth and opportunity, there's still only 1 year's worth of capital available against the current market opportunity, and we're seeing that market opportunity grow. So I think we're -- we've seen very, very significant transformation in that business, but I think that we're still in the very early days.

Great. Unfortunately, we're out of time. We'll have to leave it there. Mike, always a pleasure to have you. Thank you so much.

You too. Thanks for having us. Appreciate it.