Welcome to Ares Management Corporation's First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Thursday, April 28, 2022. I will now turn the call over to Carl Drake, Head of Public Markets Investor Relations for Ares Management.

Good morning, and thank you for joining us today for our first quarter conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. We also have a number of executives with us today who will be available during Q&A. Before we begin, I want to remind you that comments made during this call contain forward-looking statements and are subject to risks and uncertainties, including those identified in our risk factors in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with Generally Accepted Accounting Principles. Please refer to our first quarter earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Ares fund. This morning, we announced that we declared our second quarter common dividend of $0.61 per share of its Class A and nonvoting common stock. This represents an increase of 30% over a dividend for the same quarter a year ago. The dividend will be paid on June 30, 2022, to holders of record on June 16. Now, I will turn the call over to Michael Arougheti, who will start with some quarterly financial and business highlights.

Thank you, Carl and good morning. I hope everyone is doing well. During 2021 and especially the fourth quarter, the financing markets were incredibly active which led to record investment activity for us across most of our strategies. During the first quarter of '22, the Fed stepped up its fight against inflation and we saw a sharp rise in interest rates. The beginning of a protracted war in Ukraine and prolonged lockdowns in China, added further uncertainty and volatility to the typically seasonally slow first quarter. As a result, across many markets, general transaction activity slowed, yet some financing activity that would typically have tapped the traded markets, shifted to the private markets, where there is more certainty of execution and increasing scale to manage larger transactions. At Ares, it is part of our DNA to navigate volatility and to find opportunities in transitioning markets. To that point, despite the challenging backdrop, we continued our strong growth in the first quarter across all of our key financial metrics. On a year-over-year basis, our management fees and fee-related earnings increased 47% and 59% respectively and our realized income increased 62%. Importantly, our fee-related earnings accounted for 93% of our realized income for the first quarter and over 81% for the last 12 months. Our core FRE growth of 59% is especially gratifying in the face of this volatility and we believe that our prospects remain bright for continued strong growth across all five of our business groups. With a record $92 billion of available capital to invest, a robust fundraising pipeline over the next 18 months and compelling fund performance, we believe that we have strong visibility for continued growth in earnings over the coming quarters and years. Despite increasing interest rates, the global search for reliable income continues unabated as…

Thank you, Mike. Hello everyone, and thank you for joining us. As Mike stated, despite the typical seasonal slowdown which was compounded by increased market volatility, we achieved strong year-over-year growth in management fees, fee-related earnings, realized income and RI per share of Class A stock. Our fundraising platform, continued to drive strong organic growth of $13.7 billion. When combined with the AMP acquisition, our AUM totaled $325 billion at quarter end, up over 6% in the quarter. Starting with our revenues, our quarterly management fees increased 47% year-over-year, due to strong growth in fee paying AUM. The stability of our management fees was evident, as 94% of our management fees came from either perpetual capital for long-dated funds which allows us to manage our assets with a long-term perspective. We had a small amount of fee-related performance revenues in the first quarter from our managed accounts and credit, but as we've stated previously we expect 90% plus of FRPR will come in the fourth quarter, as our retail funds and perpetual managed accounts typically crystallize their fees at year-end. Other fee income increased to approximately $20 million in the quarter, more than triple from the previous year with the increase driven predominantly by property development-related fees from our non-traded REITs in addition to our typical capital structuring and origination fees in certain of our direct lending perpetual funds. For the first quarter, we generated $205.7 million of FRE, an increase of 59% over the first quarter of 2021. And it accounted for over 90% of our realized income in the quarter. Our FRE margin for the first quarter totaled about 40% which was up slightly over the fourth quarter and up 150 basis points versus the first quarter of 2021. We believe we continue to be on track for…

Thanks Jarrod. Over the past few months, we've received many questions from investors about how the business may be impacted by the uncertainties ahead of us. Ares is purpose built to not just withstand, but to excel during turbulent markets. We employ a management fee-centric model and an asset-light balance sheet, which helps drive stability. We invest primarily in floating rate credit assets in real assets that have some degree of inflation protection and we take a growth mindset in our private equity strategies, while using structural protections to protect downside risk. We also have extensive restructuring and distressed investing capabilities embedded in a variety of our strategies. We have a demonstrated track record during volatile markets and we've generated some of our fastest AUM and management fee growth through periods like the Great Financial Crisis and the recent COVID pandemic. For these reasons that we remain confident in our growth trajectory including our long-term AUM forecast of $500 billion or more by year-end 2025. I want to end by expressing my appreciation for all of the hard work and dedication of our employees around the globe. I'm also deeply thankful to all of our investors for their continued support of our company. Thanks for your time today. And operator with that we can open the line for questions.

We’ll now begin the question-and-answer session. And our first question comes from Craig Siegenthaler with Bank of America. Please go ahead.

Good morning, Michael. Hope you and the team are doing well.

Hi, Craig.

So we heard Kipp's commentary on the ARCC call about being more selective and building liquidity, but I wanted to get a sense on the overall credit quality migration of the portfolio. So I was wondering if you could comment on high-level trends like restructuring activity, early-stage delinquencies, non-accrual inflows and not just at ARCC but across the global direct lending business?

Sure. Thanks Craig. I'm glad you opened with that, because I think there's maybe a little bit of a misunderstanding about the durability of the private credit asset class in this type of environment. And what makes this so unique is we're going into this rate hike cycle with positioning at/or near all-time highs in terms of the credit quality of the book any way you look at it. So as Kipp talked about if you look at the year-over-year EBITDA growth within the ARCC portfolio, which is indicative of what we're seeing across the board we saw 20% year-over-year cash flow growth. I don't think that we've seen that before. That book is positioned with three times interest coverage against prior cyclical averages in the low 2s. We had almost record low nonaccruals at 1.2% at cost. We are entering at very low loans to value. And in that portfolio we were attaching at about 45% loan to value. So a significant amount of credit support below. And so while I understand that there are folks who are used to expecting credit deterioration in rising rate environments the reality is there's a long way to go before we would see a rise in rates materialize as increased defaults and even loss given default in the book. I think more importantly given the floating rate positioning of all of these private credit assets we would expect the next 100 or 200 basis points of rate increases to be significantly accretive not just to those portfolios but to the P&L of Ares Management. I think Kipp articulated on the ARCC call, that if you were to look at the existing positioning of that book the first 100 basis points we absorbed just based on the in-place LIBOR floors. But if you…

Thank you, Michael. Very helpful. And just had a follow-up on inorganic opportunities just seeing what you guys did with the Annaly exit earlier this week, which provided you an FRE accretive opportunity and just thinking back to the last big bad bear market when you guys acquired the Allied business, but are you seeing other properties like that especially in the BDC space which could be accretive for Ares?

Yes. I would say it's an interesting distinction Craig because you look at an Annaly or an Allied and those are obviously inorganic but those project much more like portfolio purchases than some of the platform acquisitions that we've made, both are accretive both add value in different ways. We are seeing even in the early days of the market transition more opportunities and productive dialogue around asset portfolios today. And I think Annaly is a great example of that. Some of that is the liquidity position of other players in the market and some of it is in the case of our friends at Annaly kind of a repositioning and refocus on core strategies and I would expect we'll see more of them.

Thank you, Michael.

Thanks, Craig. Do well.

The next question comes from Robert Lee with KBW. Please go ahead. Robert, if you’re speaking your line might be muted.

Sorry about that. Yes. Thanks for taking my questions. Appreciate it. Mike and everyone’s doing well. I wanted to talk a little bit about fundraising. Obviously, you talked about your outlook. But can you maybe talk a little bit about what you're seeing from the LP side? I mean obviously there's been a lot of discussion about PE cycles maybe getting drawn out but maybe other share -- other asset classes having more continued demand. Could you maybe speak a little bit to what you're seeing? And then also remind us as you get to the end of this year into next year which flagship funds you may be coming back to market with?

Sure. There's probably two or three things to unpack Rob, so I'll try to hit them in order. But maybe just as a quick reminder because we talk about an overarching secular trend in our market which is just the consolidation of share in the hands of the larger platforms across the alt landscape and that is continuing. So I think that folks like Ares are having a slightly different experience than maybe smaller or single asset managers. And I think that's being reflected in the fundraising. I think what you're referring to, which is something that we are seeing, but I would say it's largely as we're experiencing it in the private equity side of the house which is because of the active level of deployment that has occurred over the last couple of years a number of private equity managers are coming back to the market sooner than expected. And the entrenched GP base is spending more time, what I would say, re-underwriting re-ups and incumbent relationships versus new. And so, within the private equity part of the market, there are probably a number of managers who are not getting shelf space, because people are focused on re-ups, I think that will benefit, again, the larger more entrenched managers who have multiple products in the space. We are not experiencing that in other parts of the business. In our private equity business, the good news is, if that trend were to affect us, we just brought our second special ops fund out of the market at the hard cap and the ACOF fund family is not in the market today. That is a fund, to your latter question, Rob, that we would expect will be coming sometime towards the end of the year or early next year depending…

Great. That was helpful. Thanks for taking my questions.

The next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Hi. Good morning. And, Mike, just building on the last point you made around capital deployment, I was hoping you could expand a little bit, how you're seeing the deployment strategy within credit, especially in light of the fact that sponsor activity has been a little slower, albeit maybe sort of temporarily. So maybe kind of help us balance the dependency on the sponsor community for Ares to deploy capital within credit, versus the ability to perhaps write larger checks. We've seen a lot -- a number of quite sizable unit tranche deals that you and some of the others have participated in, versus maybe some of the opportunistic deployment that could come in the form of, again, more and more sort of distressed type of opportunities, but helping to kind of frame that a little bit more. Thanks.

Sure. I'm just going to -- I'm going to start with where you ended, because we hinted at this in the prepared remarks, because of the diversity of our strategies, we're deploying pretty consistently quarter-to-quarter. Where that deployment comes from is a function of what the market environment is. So if we're in an environment where new M&A transaction volume is lower, particularly within the private equity space that probably means that we're more actively deploying in our special sits opportunistic credit and alternative credit portfolios. And so, what's happening is, we're broadening out the scale and flexibility of the strategies. You're seeing more consistent deployment quarter-over-quarter. And you look at what we did in Q1 across the entire platform, both drawdown and non-drawdown funds, we put about $16.2 billion to work, which is 25% plus higher than the first quarter of 2021. So we'll only know out as we get into the year, because Q1 is seasonally slow. If you look at the ramp in transaction volume last year, a lot of that volume showed up in Q3 and particularly in Q4. So we're actually quite optimistic, given the year-over-year trend that the deployment pace will continue. We're not quite sure exactly where it's going to show up. Kipp, I think did a good job articulating some of the benefits of our market position in terms of deployment. We've articulated every quarter, the value of these incumbent relationships we have both within the existing portfolio and within the existing equity community. But Q1 is a good example two-third of the deployment of the BDC came from within the portfolio and that opportunity to continue to deliver capital into the names that we know as they either delever or scale, reduces reliance on the new issue and M&A market for…

Great. Super helpful. Thanks.

The next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Hi. Thanks for taking my question. Wondering if you could just share with us some thoughts around implications of higher interest rates across the rest of your businesses? You talked about credit, but wondering if you could talk about private equity real estate and some of the other businesses?

Yes. We cover direct lending so I won't beat that dead horse, but I do think it's an important takeaway for folks when you look at the amount of our exposures across the private credit landscape, they are all for the most part short duration floating rate assets that are through their floors. And that is going to be a pretty meaningful tailwind for us. If you look then at the real assets book there are inherent inflation hedges in that portfolio. On the credit side, they are similarly positioned on short duration floating rate assets. And on the equity side, I think, there's always a debate about the relationship between cap rates and interest rates. But I will tell you based on everything that we're seeing in the portfolios, and I think this has to do a little bit with our emphasis on industrial and multifamily property types and being in the right submarkets even against the backdrop of rising rates we're seeing utilization rent increases reflected in NOI increases all up and to the right. And we have not seen any kind of color to give back on the value side. And that's generally what the experience has been historically in these asset classes. I think we're now uniquely positioned to benefit even more than we have in the past given the industrial exposures there. And so it really comes down to PE. And as I said in the prepared remarks we do have an orientation towards growth, but I would say it's more growth at a reasonable price. And so in theory as the discount rate resets one would expect to see some valuation implication in the portfolio. You saw that a little bit in our public exposures this quarter but our experience has been historically given that we tend to be a little bit less levered than the peer set. And given the rate of growth in those portfolios that the growth outpaces the value you give back and that's been our experience so far. And given the deployment percentage there to the extent that there's a reset, we'll have an ample opportunity to put capital work into that market. And I would clarify that's really just the corporate opportunities fund because our special opportunities funds are more credit-oriented and they're similarly benefiting from the floating rate positioning of those assets. So very few places in the existing exposures where interest rates in and of themselves are going to have a meaningful impact on the portfolio to the negative.

Got you. Very helpful. And just one follow-up if I may. In terms of your wealth management solutions the distribution channel you talked about potentially seeing some impact on fundraising later this year. Just wondering if you could just expand upon that and just give a little bit more color around that? Thanks.

Sure. As we've talked about in terms of how we are building out that business we are expanding the distribution of our existing product in the channel. And I'm going to talk just about the non-traded putting aside the opportunity to grow the listed vehicles, but three existing funds being our two non-traded REITs and our credit interval fund they're showing nice sequential month-over-month, quarter-over-quarter and year-over-year growth. That's by getting deeper into the platforms that we're already on and it also comes with adding new platforms. And so depending on which fund we're talking about, we're either going deeper or we're going broader, part of the industrial logic to the Black Creek acquisition was the ability to leverage the relationships that we have at Ares with the larger platforms to broaden out the distribution of the non-traded REITs. And that's what I'm really referring to specifically when we look at it showing up in the back half of the year. It's really getting those REITs onto a number of new platforms. And then, there's a secondary growth engine, which is the launch of new product. And as I mentioned in this quarter, we've launched a new private markets fund around our private equity and secondary capability, which we hope will scale. And we have filed but not yet launched our non-traded BDC. And obviously, when that gets through the registration process, we have pretty high hopes just given our brand and position in the private credit space that will show some meaningful momentum in the back half of the year. The third thing we're working on is the globalization of the wealth management franchise. Up until today, it's been largely focused on North American distribution. And we've been building out our teams and capabilities across the Eurozone and APAC region to start globalizing the distribution as well.

Great. Very helpful. Thanks. again.

Thank you.

The next question comes from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Hi, everyone. Good morning. A question on direct lending, where asset managers, peers are increasingly providing these rated note structures to insurers. Is the underlying originated paper overlapping with typical direct lending now and thereby, becoming a major competitor?

So the answer is it does, but I wouldn't say that's becoming a major competitor. I think you just have to think about people access direct lending assets through different mechanisms. You can access it through traded BDCs, you can access it through nontraded BDCs, you can access it through commingled fund structures. And if you're an insurance company, you can access it efficiently through rated note structures. But the structure in and of itself, as we're experiencing it, is not changing the competitive dynamic in the market. It's really just a structural opportunity for folks to access the market in a more effective way for them. But yes, the exposures would be very similar.

Okay. That's helpful. And then a follow-on on ARCC that was a little more active in follow-on equity offering or at the market offering this quarter. Can you talk about the outlook or if we should think about a certain cadence for growth there in the public BDC?

Kipp, do you want to take that one?

Yeah, I'm happy to. I hope everyone can hear me. We – look, I mean, issuing equity at the BDC is something that we believe is good for the long-term health of that company. We continue to believe that emerging from COVID, we've gained a lot of competitive traction and are better positioned. As most would recall, we haven't raised equity in a material call cadence in seven years until we did a couple of follow-on transactions over the last 18 months. But ATM issuance is pretty common, I think, for our company and for most of the other BDCs along with a whole lot of REITs. We think it allows us to add a little bit of scale as we continue to grow into what's been an amazing growth opportunity for that company. So in terms of cadence here, there are limitations in terms of what you can do. Obviously, if then you followed the BDC, so you have a good sense for that – FTC, it's relatively small. It's just a way for us to continue to build capital scale there over time and to do it accretively.

Thank you, Kipp and Mike.

Thanks, Finian.

The next question comes from Adam Beatty with UBS. Please go ahead.

Thank you, and good morning. You mentioned being underpenetrated with your existing client base. And so I'm interested in maybe a little bit more detail around your thinking there and what you're seeing, particularly I guess, in the institutional channel, I sort of assume, maybe you'll correct me on this, that the retail and the newer insurance channel are underpenetrated, that makes sense. But in the institutional channel a lot of investors think of that in terms of being mature, being very penetrated. So just wondering whether in your mind, it's a question of kind of more of an allocation to alternatives or more of that allocation going to Ares and what might drive the penetration upward toward the potential for Ares? Thank you.

Sure. Adam, it's Jarrod. I just figured, I'd take this one. Overall, when we talk about penetration, we're talking about a lot of it is the number of funds that our investors are invested in. And right now, about 60% of the platform is one fund for the investor and the other 40%, about 35% of that is two through five. We're really seeking to broaden the number of funds that our LPs participate in. So we feel like we can really grow that greater than 5% from the sex percentage to a much higher number, which will allow us further penetration across their wallet gain wallet share and that's really driven things like the recent acquisitions we've made and the number of platforms that we have, that allow our LPs to come in and have a lot of different choices so that and to Mike's point earlier that it's not one commingled fund that we're really dependent on in our fundraising, but a number of different funds and a number of different offerings that we're able to penetrate our investor base into having a number of products with Ares.

Yeah. And you would see a similar breakdown, if you looked at it kind of by strategy. So we're cross-selling people across fund families and then across different parts of the business. The way you see this playing through in the math just to understand it is, if you look at number of investors in any given year, we've been running at roughly 50-50 in our institutional fund raising. So roughly, half of the investors that come on to the platform are new. But as I mentioned, maybe the 90% of the dollars are from existing. And so we're taking greater share. And then as people stay on the platform, they're investing more with us.

Got it. Thank you for the context and planting out those numbers. I appreciate it.

The next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

Hey. Good morning. Thanks for taking the question. I was hoping you could talk a little bit about how your underwriting criteria has evolved in the current environment and how that looks today versus say a year ago?

It's a general question. And obviously, we do a lot of things here Mike, but I'm going to give you a general answer which is our underwriting is the same through market cycles, because if we're doing our jobs well and we're looking at the different scenarios going in, we've accounted for all the things that people are worried about now, whether that's ability to service debt, ability to pass-through prices, cost input increases. So the underwriting framework has not changed, nor would I expect it to and that's what's led us to be so successful over our 25 years investing through these different markets. That being said, obviously you'll over-index the analysis in an environment like this in terms of what risks you're willing to take and when you're willing to take them. But I'll give you the simple answer that I don't think that good investors change the way that they approach investing I think they change maybe the way that they're thinking about where they are in the cycle but that's a slightly different perspective.

I guess maybe to rephrase are you moving more senior in the cap structure? Are you shifting to more covenant type from covenant light? Just curious how you're thinking about kind of the credit book and how…

Yeah, it depends on which part of the business that you're in. But when you get into a market where there is uncertainty, a lot of our strategies will do exactly what you just said which is derisk either through moving up the capital structure or putting more structural protections in place. Each of the different strategies is going to express that view differently. But the answer is, yes. And some of that is what you're willing to do and some of that is where you are in the market transition. So one of the reasons that transaction activity slows very early in this type of a market shift is folks like us will have a different view on the structural protections that we would require for a certain return. And then we have the price discover and structure discover in the market to see where things will clear. Once you then reset, you will begin to see the activity pick back up again. So I would say generally people are cautious in their positioning as is appropriate, but again not really a fundamental shift in underwriting.

Great. If I could just ask a follow-up question on the non-traded BDC and the retail private market secondary fund those two retail products that you guys are bringing to the marketplace. So I was hoping you could just maybe talk a little bit about how the products are going to be structured? And on the non-traded BDC side, how that sort of investment strategy differs from your existing BDC?

Yeah. So the private markets fund is a RIC structure that will be largely at least in the early scaling of that fund be leveraging our secondaries capability, maybe stating the obvious in order for the retail investor to access PE the way that they want to secondaries work just because it gets sort of the J curve and the administrative difficulties of capital calls and the like that you would need in a larger institutional wrapper. And that will be a nice complement to our flagship fund families, not just in the secondaries business, but also within our PE business as it grows. The non-traded BDC is interesting because to the earlier question around fundraising, ARCC is a very large pool of capital roughly $20 billion, but it is not accessing equity the way that the non-traded peer set is, it's actually a pretty interesting phenomenon just thinking about how public-listed BDCs access equity and grow versus public non-listed BDCs. So we do think that from a capital formation standpoint, it will be complementary to our private credit fund offerings. In terms of how it will look relative to the public BDC, really too early to tell, because we have actually launched the fund. But what I will tell you is the required return in the non-traded market is fundamentally different than the required return in the public market. And so by definition we would expect the asset mix and the non-traded BDC to look meaningfully different than what would be in the listed vehicle. I think we're in a unique position relative to the peer set to bring something unique into that market. As an example, if you look at our interval fund, which continues to scale nicely that has very broad-based exposures across the entirety of our liquid and illiquid credit platform all in one line item. And so I would expect to see a broader diversification across the platform in the non-traded side of the house versus the listed if I had to guess.

Great. Thank you.

The next question is a follow-up from Robert Lee with KBW. Please go ahead.

Thanks for taking my follow-up. Jarrod, I just had a couple of quick really kind of more modeling questions. But I did notice in the quarter, it seemed like the fee rate kind of came down a little bit. I don't know if there were just some timing issues there or anything we should be thinking about. And also I know sometimes seasonally 1Q could be a low tax rate around maybe restricted stock grant vesting or whatnot, but tax rate also seemed a little low. Can you maybe just kind of update us on expectations there?

Sure. I'd say on the fee rate, it's really a result of new products coming on to the portfolio something like the Aspida management fee at 30 bps is lower than our standard 1% fee rate. And then you also have some of the impact of the Part 1 fees as that fluctuates up and down that really adds a little bit to your fee rate. But in general, when you think about our standard product and our current launches the fees have been consistent. So it's really just a timing quarter-over-quarter. On the tax rate, I think, that that's -- it's a pretty consistent rate for what, I think, we guided to and it's pretty consistent to our total year-to-date rate from prior year. We expect to be in that let's call it 10% to 15% range on current taxes. And so I think that there are things to your point that move quarter-over-quarter that are a little bit harder to predict. But in general, we feel pretty good about that that range.

Great. That was it. Thank you.

Thanks, Rob.

We have no further questions. So this concludes our question-and-answer session. And I'll turn the conference back over to Michael Arougheti for any closing remarks.

No. We just as always appreciate everybody's support and taking the time to spend with us today and look forward to giving people another update next quarter. Thanks for the time.

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 May 28, 2022 by dialing 877-344-7529, and to international callers by dialing 1-412-317-0088. For all replays, please reference the conference number 2663600. An archive replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. Thank you all very much for attending. And you may now disconnect.