Welcome to the Ares Management, LP’s Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference call is being recorded on Wednesday, November 12, 2014. I will now turn the call over to Carl Drake, Head of Ares Management Investor Relations. Please go ahead.

Good afternoon and thank you for joining us today for our third quarter earnings conference call. I am joined today by Tony Ressler, our Chairman and Chief Executive Officer; Michael Arougheti our President; and Dan Nguyen, our Chief Financial Officer. In addition, Bennett Rosenthal, our Co-Head of Private Equity and Greg Margolies, our Head of Tradable Credit will also be on the call today and available for questions. Before we begin, I want to remind you that comments made during the course of this conference call and webcast contain forward-looking statements and are subject to risks and uncertainties. Our actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings. We assume no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. Moreover, investors should note that investment performance in our funds as well as investment of our funds is discrete from an investment at Ares Management L.P. During this conference call, we will refer to certain non-GAAP financial measures, including assets under management, fee-earning assets under management, economic net income and distributable earnings. We use these as measures of operating performance, not as measures of liquidity. These measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. In addition, these measures may not be comparable to similarly titled measures used by other companies. Please refer to our earnings release and Form 10-Q for definitions and reconciliations of these measures to the most directly comparable GAAP measures. I’d like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any Ares fund. We’ve also posted a new third quarter earnings presentation under the Investor Resources section of our website at aresmgnt.com, which we will refer to during our call today. I will now turn the call over to Mr. Tony Ressler, Ares’s, Chairman and Chief Executive Officer.

Thanks, Carl and good afternoon, everyone. Before I turn the call over to Michael and Dan to update you on a few performance highlights and to walk through our third quarter results, I’d like to take a few minutes to provide a progress update on Ares as a public company after our first two quarters. As we discussed on our call in June, there were a number of reasons we believe that an IPO would benefit Ares. We thought we could accelerate our growth through strategic acquisitions, strengthen our access to debt and equity capital for growth and thirdly, improve our fund-raising capabilities, particularly as our brand grew with new global investors. I think we’ve made good progress in all three of these areas. First, a few weeks ago we entered into a definitive agreement with one of the oldest and most successful private equity firms in the United States focused solely on the energy infrastructure sector, named Energy Investors Fund, or EIF. We have had a longstanding relationship with and a great admiration for EIF through our direct lending energy and power. We are very excited that the addition of EIF will expand the capabilities of our private equity group into a complementary area and an asset class that investors desire due to the long-term and contractual nature of these cash flow and hard assets. The EIF transaction is a good example of our approach to acquisitions. We look to complement our existing expertise and partner with like-minded investment teams that have demonstrated excellence in investing over long periods. We will primarily use our cash on hand and to a lesser extent our public units as currency to finance the transaction. With EIF, we will add approximately 4 billion of AUM in energy related investments across private equity and…

Great. Thanks, Tony. Let me begin by touching on some general themes and highlights that will hopefully help provide some context around our third quarter results. As Carl mentioned, I’ll refer to our third quarter earnings presentation starting on Slide 3. As you’ll see on the capital-raising side, we continue to be successful raising AUM across our business lines with more than $3.8 billion in gross new capital raised during the third quarter and more than 19 billion over the last 12 months. The fund-raising environment remains very constructive and there is robust demand for each of our direct lending, tradable credit, private equity and real estate investment strategies. Global investors, whether pension funds, insurance companies or retail investors, are in need of additional return without excessive risk and are increasingly looking to diversify firms like Ares to provide alternative non-correlated investment solutions. So despite $5.7 billion of distributions to investors, our AUM still grew at a healthy 14% year-over-year pace. Our available capital, which we often refer to as dry powder, remains near record levels at 18.5 billion. We continue to make progress growing our core management fee business and associated fee-related earnings. Dan will walk you through this later in the call, but our management fees and FRE increased quarter-over-quarter by 7.2% and 17.6% respectively as we’re beginning to see a pickup in our FRE margins. Management fee income, which is derived from a diverse set of funds and includes ARCC part-1 fees, continues to be the vast majority of our total net fee income representing 94% for the last three months and about 90% for the nine-month year-to-date period. We expect to continue to grow our FRE again in the fourth quarter based upon capital deployment in funds paid on invested capital and incremental fees earned on…

Thank you, Mike. For those referring our third quarter earnings presentation, I will touch on data containing on Slides 13 through 16. As Mike stated, we continue to enjoy solid management fee growth from a balance and diverse source of strategies. We are also starting to experience some margin improvement on our fee-related earnings as we invest and earn fees on capital invested without of course the need to incur the same level of expenses. Our third quarter fee related earnings of 41.2 million increased 7.9% compared to 38.2 million for the third quarter of 2013, excluding payment of a onetime deferred fee of 13.9 million, and 17.6% compared to 35 million for the second quarter of 2014. We expect that our fee related earnings will continue to grow from a combination of new capital raises and the deployment of our significant capital, both current and new, against our slower growth rate in expenses. Our perform related earnings were lower due to the weaker market pricing through the end of third quarter compared to the second quarter of 2014. Third quarter perform related earnings were 30.8 million compared to 40 million in the second quarter. The decline was attributable to low PRE and attributable credit and real estate groups partially offset by increased PRE in direct lending. As Mike stated, funds in our Tradable Credit Group, which invest in the combination of loan high yield structure credit and special situation assets, generally followed the relevant benchmark were modestly lower for the third quarter. While there will always be variability in asset pricing, we believe our performance fees, which are weighted toward the credit side of the capital spectrum, should generally exhibit low volatility. Our third quarter pretax economic net income of 72.1 million was slightly below the 75.1 million we…

Great. Thanks, Dan. So, in closing, we believe that we are positioned for growth in the year ahead given our expanding platform, our significant fund-raising pipeline, our long lived and diversified capital base and strong investment performance across our four business groups. Our investment strategies give us the ability to be flexible and balanced so that we can take advantage of investment opportunities regardless of the interest rate or market environment. Should volatility increase, we believe that we are well positioned across our strategies to take advantage of those investment opportunities. Our high composition of fee related earnings and the diversity of our management fee streams provide an underlying stable source of distributions for our unitholders. In addition, we believe that we have built the foundation for higher margin growth. We have $18.5 billion of dry powder as of September 30th and the ability to drive growth in management fees and FRE as we invest the portion of this capital. And finally, our balance sheet and access to capital gives us great optionality to pursue exciting opportunities to expand our business with accretive acquisitions like EIF. So I want to thank you for your time and support and thanks to our dedicated employees for all of their continued hard work and effort. And with that, operator, will you please open the line up for Q&A. Thank you.

(Operator Instructions) And our first question will come from Ken Worthington of JP Morgan.

This is [Amelia] for Ken Worthington. With the increased market volatility in September and particularly the first half of October, just how good of an opportunity was that to deploy dry powder particularly in Tradable Credit?

I am joined here today by Greg Margolies who runs our Tradable Credit business and Kipp deVeer who runs our Direct Lending business. I’ll make just a quick observation. It was pretty short lived. I think we’re encouraged by the volatility, but speaking to some of the excess liquidity in the market, that window closed very quickly. So we were in the market where we could be with our liquid funds. As Kipp discussed on our ARCC conference call last week, the pipeline of loans that were in the commitment process throughout that week or two period of volatility, we did have the opportunity to see spreads widen and repriced. But the reality is I think we wished it would have lasted a little bit longer to take more advantage of that. Maybe for tradable credits specifically, I’ll turn it over to Greg for some color on that.

I agree, we did use the opportunity to buy some of the franchise companies that we believe in both our long only and our alternative funds. But I agree with Mike. It was both short lived and it was more of a mark to market basis, because there wasn’t quite as much trading as you’d expect. I think what we found was that the trading desks at the banks were more market down as compared to actually transacting a significant amount of capital there.

Separately with the growth [indiscernible] and a lot of money in motion, has Ares seen any opportunities to capture some of the expected institutional bond related redemption in the credit based products?

We continue to have a very robust pipeline of conversations with pension funds across the U.S. that are looked to reallocate capital from traditional fixed income and long only products into some of our more dynamically oriented funds. And so that dialog has been strong and certainly picked up over the last few months.

If you look at the amount of fund raising activity in our tradable credit strategies, which do encompass some of our dynamic and unconstrained credit mandates, we raised $2.3 billion of new capital in the third quarter alone and that brought our trailing 12-month total to about $12.3 billion in fund raising in those strategies. So some of it clearly was money moving around the market, but I think a lot of it is people who are obviously trying to position for the increased market volatility and we’re definitely a beneficiary there.

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So first question on EIF, just wondering if you guys could maybe share some of the economics of that transaction with us and specifically wondering what kind of fee rate on these assets we should be thinking about and then the related margin? And then in addition to that, do these guys have any incentive creating AUM that they manage?

So I think at this point in time the deal has been signed but not closed and we will not be giving specific economic information on the transaction, although we have made some disclosures to the extent we can in terms of the amount of equity issuance that will be using to fund a portion of the purchase price. Vis-à-vis the economics a couple of comments I will make are we do expect it to be accretive upon closing given the installed base of about $4 billion fee paying AUM in place. And we do hope and expect to be continuing to capitalize the growth of that platform early in 2015. We’ve seen new fund raisers and mandates around the strategies that they run. What we’re most excited about is obviously this is a platform that’s been in existence for 25 years, very long dated track record, really fills in what is an already broad and strong product offering in energy for Ares. And what many people may not appreciate is today prior to the EIF acquisition across direct lending, private equity and tradable credit, we managed in excess of $3 billion in energy and energy related assets. And prior to the acquisition, that encompasses everything from syndicated bank loans and high yield down through to the private loans that we make through the BDC. This infrastructure oriented opportunity that encompasses power generating assets as well as transmission and midstream assets we think fills in a very interesting gap if you will in our product set. These are very [indiscernible] hard assets, tend to come with mid teens to low 20s type IRRs and do get managed in traditional private equity like structures, which is why this will reside within our private equity group. The compensation mechanisms for these assets do look like private equity funds, so management fees in excess of 1.5% and traditional private equity type carried interest.

And then Mike, I just want to follow up on something that you mentioned there in your prepared remarks about the environment for originations and there being a lot of liquidity flushing around. Just wondering has that gotten worse over the last couple of quarters? What I mean by that is, is there more liquidity kind of floating around the system than there was not too long ago? And then related to that, are you guys seeing that across all or your verticals or there is specific pockets where you guys might be a little bit more aggressive just because there is less competitors there?

Why don’t I try to answer the second part first and then I can let Greg or Bennett or Tony and others chime in as to what they are observing. The nice thing about the Ares platform is that we have such a broad diversity of fund products in different asset classes, in different geographies, debt and equity, liquid and illiquid, so clearly we are mandated to do is to look across each of those markets and try to find the best risk adjusted return at any point in time within those markets, but obviously with an eye towards the relative value across those markets. Importantly for people to understand too is we participate in very, very large addressable markets. So if you look at the syndicated loan in the high yield bond market, that’s a $3 trillion addressable opportunity. If you look at the direct lending markets that we participate in, that’s probably a $1 trillion global opportunity, private equity, similarly sized and real estate probably the largest market. So, what we tend to do across each of our strategies when we see increased liquidity or shrinking risk premium is that we will be more selective and try to use our origination and information advantages to really exploit whatever inefficiencies we can gain through the origination. So, as you saw with our $3.7 billion of deployment, it was actually pretty balanced across each of our strategies. But if you did speak to each of the PMs and I’ll let them chime in here, I think you'll hear a consistency of approach, which is understand that the fundamentals are strong, try to use liquidity to your advantage in terms of seeing incremental deal flow, maybe resetting the liabilities in your leverage and then just be highly selective. I think the good news is plenty of good things to continue to invest in.

And the next question comes from Doug Mewhirter of SunTrust.

Thanks for your overview of EIF. Most of my questions have been answered on that front. Moving over I guess geographically, Europe actually continues to be pretty interesting. Seems like there is a ray of sunshine and then it kind of dips back down and then so on. The euro is obviously getting weaker which kind of put that in your accrued results, although maybe not your economic results. Have you appreciably shifted how you approach the markets in Europe in terms of where you focus or maybe that your view of the risk profile? I know you New York's a big place, especially northern versus southern, but just there seems to be a lot going on there and you have a pretty big footprint and I am just wondering how you are reacting to this? And whether you think it's a opportunity or something that calls for more caution?

I think it's both an opportunity in certain jurisdictions in certain asset classes maybe does call for caution. But let me take a step back and remind people what we have in Europe today, how we’re positioned to take advantage of the market and then we can drill down into maybe some of the individual market opportunities. But about 20% of our AUM today or in excess of 15 billion resides in Europe across each of our strategies. And as you’ve seen in the results, we continue to raise capital behind private equity opportunities. So one of our most recent private equity investments in fact came out of our European footprint. As you saw with our real estate fund raising efforts, we are accumulating and deploying capital quite nicely in our European real estate businesses across multiple geographies. Our European direct lending platform, we think continues to be a market leader really exploiting the first mover advantage and origination capabilities that we have there. And Tradable Credit, we have been quite prolific raisers of capital to attack both the primary and secondary market opportunity. So to say we’re excited about the European opportunity I think would be an understatement. We’ve now been in Europe for over eight years which approximately makes us one of the first people to really move into that market in a meaningful way. And with the 100 people on the ground in six offices, I think we have a very interesting platform to take advantage of the opportunities. Maybe Greg if you want to just ouch on some of the things we’re seeing in tradable credit I think will be good indication of the breadth of opportunity that we’re seeing there.

We’re seeing two different markets if you will. On the alternative side or more illiquid side, we continue to see very good opportunities coming out of the secondary and tertiary banking systems in terms of assets coming off the bank’s balance sheets. That is a trend that we saw a year or so ago where we saw very healthy pipeline, diverse pipeline and we expect to continue to see that flow over the course of the next three plus years as banks continue to lighten up on assets to fix their balance sheets. And then on the more liquid side of things, it's very specific as to where we see opportunity and where we see risk not being sufficient for the opportunity. So generally on a broad brush statement, I would say that companies that are internally focused to the European consumer are a little bit less interesting today as compared to a number of and/or many European assets and companies that are more globally focused and more excellent focus where we see real opportunity in terms of mix pricing and opportunities for entry points.

I think it's possible, as Mike and Greg just said - this is Tony Ressler speaking - it's actually from our perspective at least you could be concerned about GDP growth, you could be concerned about access to bank credit in the European market and yet be excited about growing frankly all four of our businesses. And as Greg described in Tradable Credit or as Mike was suggesting in growing our Direct Lending business or what we’re seeing in both private equity and real estate, we are investing in growing substantially in the European market despite, if you will, the concern about GDP growth that we have as a firm.

And our next question will come from Marc Irizarry of Goldman Sachs.

Tony, I just want to go back to the capital that you’ve raised since the IPO and you mentioned just sort of bringing on new LPs. Any update in terms of the mix of your LPs on a global basis? Where you’re seeing maybe some traction from maybe new investors coming in and just the overall sort of how you see the opportunity from U.S. versus non-U.S. LPs?

Sure. Listen, as we said, going public we thought would help our brand, would help our access to the capital markets, would help our ability to acquire asset managers if we thought they filled all the appropriate requirements that we had. We feel strongly it’s the case on all three, specifically the fund raising. There is no doubt, we have a ways to go in building our brand globally. That we know. On the other hand just being public I think it has helped us in the European marketplace, I think it has helped us again specifically with European institutions phasing and up even with U.S. institutions with insurance companies and the insurance industry generally where they’re looking at many of our product particularly in the real estate lending and the structured credit arenas. So yes, there is no doubt, Europe, there is no doubt in the insurance industry and frankly in Asia as well, I think it’s fair to say we've known a little bit in the Gulf. But all that being said, there is no doubt that we’re seeing pretty consistent growth across our global marketing efforts. And I do think that’s been a benefit spurred by the IPO. You can check on us more easily.

One quickly follow on statistics so I think is indicative of the overarching market trend which we’ve talked about on prior calls is that we do see the global LP base consolidating its GP relationships with broader global diversified firms like Ares. So not only are we seeing new institutional investors come to the platform across different channels, but we’re seeing increased cross platform investing from our existing investor base. And if you look at the roughly $8 billion of capital that we raised this year-to-date alone directly from investors i.e. not through our public companies or through intermediaries, about half of that was new investors and about half of it was actually commitments to new and existing product from existing investors. So, we’re seeing a really healthy mix of new people coming to the platform and increased investment from our existing investor relationship.

And then Mike just on EIF, it sounds like we have to sort of wait and see for details on the transaction. But just curious is this a what we do see some of the detail there is just sort of structure the one we should expect going forward and I don’t know if you can talk about whether or not existing carry was contributed on this deal?

So I think it will be indicative of the types of structures that we will use going forward i.e. acquiring in place fee related and incentive earnings and then looking to grow a fund off of that foundation. I think what you will also see obviously part of the accretion is coming from obviously the structure of the transaction and the purchase price, but obviously this company just given the nature of its assets and business runs in a much higher FRE margin and the aggregate business does. So, we’re pretty excited about it I think you’re going to see a nice margin improvement coming through the business as a result of the acquisition. So yes, we are acquiring certain incentive generating assets at closing and then on a go forward basis consistent with the way that we manage our other pools of capital a portion of incentive fees will go to the team on a go-forward basis with a portion coming back to Ares Management.

And I think we would add there is a whole lot in EIF that we think is complementary to what we’re doing. Obviously we think offering another 15% to 20% rate of return product that complements what we’re doing in ACOF and our Private Equity business, in our Asian Growth Capital business, in our Special Situation Funds and Tradable Credit, in our Real Estate Funds in both the U.S. and Europe, having if you will an additional expertise in the energy infrastructure asset class that we’ve been lending to. So again, it complements what we’re doing. It expands some of our higher return products. It’s highly accretive to our investors. We think it fills all the appropriate boxes in what we look for.

And the next question will come from Robert Lee of KBW.

This is actually [Andi] calling in for Rob. I just wanted to take a look at that 9.4 billion of AUM not yet earning fees and I was just wondering if you could provide any color on what portion of that capital earned fees as it gets deployed gradually and how much of it is in a fund where it just kind of needs to get turned on and maybe that’s quicker turnover and we might see more of a spike and maybe some catch up fees in management fees. I am just really trying to get some visibility around the topography of those assets.

So if people want to refer to the investor presentation on Slide 7, you’ll see a breakdown of the dry powder and then a drill down into the AUM not yet earnings fees by business line. And you’ll see of the 9.4 billion, about $6 billion of it is within our direct lending business which incorporates capacity both within ARCC as well as our European direct lending business. All of those assets generate fees upon investment, not commitments, so obviously a big opportunity to generate very high marginal profit dollars as those dollars get invested. And then about $2 billion resides within our tradable credit business and that’s a little bit more balanced. I’d say probably half of that is on investment and half of it is upon commitment. And then real estate and private equity at the top of that bar chart you’ll see represent the remaining 1.4 billion and I think people are aware of that, those we’re getting paid on commitments. So the bulk of it is actually going to be deployment related as you can see here.

And just kind of going to this quarter, just quick question about the placement fee and underwriting cost line item and also depreciation and amortization. They seem to run a bit high this quarter and I understand those can dance around a bit quarter-to-quarter. But is there anything you would point to this quarter or any color you can give on maybe why those would spike a little bit?

Sure, this is Dan Nguyen. You are correct, this quarter is – that line seems to be a little bit higher than what it was in the second quarter simply because placement fee, as you know, with the European real estate we incur about approximately about $3 million in placement fee for that particular fund this quarter and we also have another line item in there which is the loss on disposal of assets in connection with the relocation of our London office about another $2 million that we booked for the quarter. So that number can bounce around from one quarter to next. But again, as you can see from the definition of what we disclosed in a definition fee related earnings, we don’t expect this to be recurring items and is not core to our operating performance.

And next we have a question from Bulent Ozcan of Royal Bank of Canada.

Sort of go back to the energy investors fund question and you might have answered the question already to as much as we can. But I was wondering about the accrued performance fees associated with these assets. Is that part of the deal, did you require these as well? Or will you be basically generating performance fees based on new assets and new additions?

We answered that already, but let me try to give a little bit of a different take on it so people appreciate the structure of the transaction. When we acquire a private equity oriented asset manager, most of the incentive fees in historical funds have been allocated out to the investment teams over the preceding years. That said, similar to the structure there is management and its peers a portion of those incentive fees reside within the management company and oftentimes we will acquire that portion as part of the acquisition. Similarly for funds that may be in an earlier stage of the lifecycle, we may acquire certain GP interest that would generate investment income and give us access to certain incentive fees as a result. But the bulk of the incentive is generated off of the EIF transaction will in fact come from future funds as opposed to past funds and the bulk of the economic value on acquisition will be from the management fee which I mentioned is coming in a very high margin.

Could you give us basically maybe as far as the target size for these two new funds that you would like to raise in private equity for Asia and the energy focused funds?

Sure. We don’t comment specifically on future fund raises. But energy investor funds ForeFund which is their most recent fund was raised 2.5 years ago and had a $1.7 billion fund size, just to give you a general sense for the size of the funds that they typically invest. And as we’ve talked about with Asia, fund 1 was 225 million and our expectation would be that we could see a doubling of that fund upon launch.

Maybe a final question on business development companies and basically your perspective here on the U.S. market. Seems like the net investment income for some of the peers [indiscernible] enough to pay for [indiscernible] dividends, it seems like the portfolio yields are declining to a certain degree. What do you see in the markets right now and what leverage do you have to increase the portfolio yields?

I am not going to comment on the market, but I will comment on ARCC's position in the market because I think it is entirely differentiated. For those who know us, we run the largest BDC by market cap and by assets. I think we’ve differentiated ourselves in terms of the scale of the balance sheet, the scale of the origination capabilities that we have to drive investments on to that balance sheet and the structure of our liabilities really best position us in a way that is unique in the industry. When you look at ARCC's performance, you will see that we are covering the dividend from core earnings this quarter. You’ll see that our realized gains continue to exceed our realized losses generating still over income in a very meaningful amount. And you’ll actually see that while spreads have come in quite dramatically over the last 18 months, it's come with a commencer derisking of the portfolio as we focused our attention up the balance sheet and in fact over the last couple of quarters we've seen some spread widening out. So, when you look at the total return proposition that's being generate at ARCC right now, generating a 12% to 13% ROE on very conservative leverage and accommodating the tightening spread environment. So, we’re obviously very bullish about the Direct Lending opportunity in U.S., we’re very cautious about ARCC's position and I think we’ve demonstrated the ability to generate very high ROEs in a spread tightening environment that work on the right hand side of our balance sheet and obviously gains and we’d expect that to continue.

And I think in terms of [indiscernible] probably sounds like you are still able to find an asset type of opportunities in U.S.?

I encourage folks substantially time with the earnings release from ARCC that came out last week. But what you will see is, again as I mentioned, even with very high selectivity we leveraged our existing portfolio of company relationships in our origination to have a very, very solid deployment quarter of roughly $700 million of net deployment in ARCC in the third quarter.

I am showing no further questions. I would like to turn the conference back over to management for any closing remarks.

Well, we appreciate you spending so much time with us today and look forward to talking to everybody next quarter. I will just say in leaving, as Tony mentioned in the prepared remarks, now two and a half quarters into being a public company, we couldn’t be happier with where the business stands. I think our core competencies in raising capital and investing it well generating very strong and consistent performance for our investors is as good it has been and we look forward to sharing our results with you next quarter. Have a great day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.