Welcome to Ares Management Corporation's Third 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 October 27th, 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 third quarter conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. 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 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 not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our third-quarter earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly-comparable GAAP measures. 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 fourth-quarter common dividend of $0.61 per share of our Class-A and non-voting common stock, representing an increase of 30% over our dividend for the same quarter a year-ago. The dividend will be paid on December 30th, 2022, to holders of record on December 16th. Now, I'll turn the call over to Michael Arougheti, who will start with some quarterly financial and business highlights.

Great. Thank you, Carl, and good morning everyone. I hope you're doing well. In the face of geopolitical tensions and rising inflation, energy costs, and interest rates, our business continues to generate steady growth and deliver strong relative performance for our investors. During the third-quarter, we continued our strong growth in our AUM and fee-related earnings despite the challenging environment and a continued slowdown in overall primary market activity. Our suite of products continues to resonate with our investors as we raised more than $14 billion of gross commitments for the quarter, bringing the year-to-date fundraising total to more than $44 billion. We're pleased with the breadth of our fundraising activity to date, which only included $2.1 billion in fundraising this year from our largest commingled funds. The flexibility of our investment strategies is also reflected in our steady deployment, which remains strong and was relatively flat versus our activity levels a year-ago. These factors drove growth in our AUM metrics, management fees, fee-related earnings, and realized income ranging from 21% to 28% on a year-over-year basis. Before I walk-through some quarterly business highlights, let me start by framing why our business has been so resilient during volatile markets like we're in today. It all starts with our management fee-centric business, which provides a more stable realized income compared to more performance fee-based and balance sheet heavy business models. For example, on a year-to-date basis, we generated more than 90% of our total fee revenues from our management fees and over the same period 92% of our realized income was derived from our fee-related earnings. This rich mix of FRE based earnings has also been steadily increasing over the past three years. Another important component of our business is our asset-light balance sheet, with balance sheet investments representing less than…

Thanks Mike. Hello everyone. And thank you for joining us again this quarter. As Mike mentioned, our third quarter results emphasized the resilient nature of our business as we delivered strong growth in management fees, fee-related earnings, and fee-paying AUM. Our quarterly management fees increased 23% year-over-year to $552 million driven by continued deployment and growth in our fee-paying AUM. Our other fee income totaled $28 million in the third quarter, up over $5 million in the second quarter and more than double a year ago. The quarterly increase was driven predominantly by property-related development fees from our non-traded REITs in addition to our typical capital structuring and origination fees and certain of our direct lending perpetual funds. In the third quarter, we generated $233 million of FRE, an increase of 28% over the third quarter of 2021. As expected, we had virtually no fee-related performance revenues during the third quarter and we continue to expect 90% or more of our annual FRPR to occur in the fourth quarter. Through September 30th, our non-traded REITs had agreed $159 million gross performance participation for Ares. As these funds pay on an annual basis, this value is not included in our accrued net performance income or our fee-related performance revenues since it remains subject to the fund's future returns. FRE as a percentage of realized income was over 95% in the third-quarter, driven by the steady growth in our management fees and more modest net realized performance income. Our FRE margin for the third quarter was 40.2%, up slightly over the second quarter and up over 100 basis points versus the third quarter of 2021. We continue to feel good about the 45% margin target as well as the other targets we laid out at our Investor Day last year. We generated…

Thanks Jarrod. I believe our results underscore the durability and consistent trajectory of our business and our ability to take advantage of weaker competition during times of volatility and uncertainty. Over the past two quarters, the global equity markets declined more than 20% and banks and the liquid credit markets have been severely constrained. During this time, we've delivered strong relative investment performance across most of our funds, continued growth in AUM, management fees and fee-related earnings, and improved our operating margins even while continuing to scale our platform. While there are clearly challenges that lie ahead, we have a deep and experienced team that has demonstrated an ability to grow consistently through volatile markets. The combination of our experience, sizable platform, portfolio positioning, long-dated capital base, and ample dry powder, all provide us with the tools that we need to generate successful investment outcomes for our clients, which in turn we believe will drive successful results for Ares' stockholders. I'd like to end by expressing my appreciation for the hard work and dedication of all of our employees around the globe. I'm also deeply thankful to our investors for their continued support of our Company. And with that, I'd just thank you for your time today. And operator, could you please open up the line for questions?

[Operator Instructions] Our first question comes from the line of Craig Siegenthaler of Bank of America. Please go ahead when you're ready, Craig.

Good morning Mike, hope you and the team are doing well.

Thanks Craig.

So we appreciate the updated commentary on the European waterfall opportunity. It looks like the 2023 and '24 performance fees are mostly going to come from a handful of 2017 and 2018 vintage drawdown funds in private credit. But the subsequent vintages have scaled larger. So does this mean this European waterfall ramp will continue beyond 2024 with the newer vintages, or is this fee stream going to be more cyclical and could exhibit some deceleration like your American waterfall funds?

Hi Craig, it's Jarrod. Thanks for the question. I think the way you'd want to think about it is, and we've talked about it a lot - it will track similar to how management fees also. As we deploy, we earn more management fees. In this case, that's what we think so exciting about these European waterfall style funds is that as the subsequent vintages have been raised larger and as they're deploying, they're often deploying at a yield on the individual assets above the hurdle rate. So they're building that pre-balance over time. So we actually expect a steady and growing balance of accrued related to these, European style waterfall and that it would continue period-over-period, much like management fees do.

Jarrod, that's great. Just as my follow-up, you had a really strong quarter on the investing front. Credit drove 12 out of the 18 can this, trajectory sort of continue? And are there any headwinds to investing, especially on the credit side of the business, where I think you're more flexible versus some of the other funds where you need more willing sellers?

No, I think deployment can continue. As we talked about in the prepared remarks, Craig, the beauty of the platform is; one, it's diversified by asset class and by geography, and the bulk of our strategies have the ability to pivot into the liquid markets when we get into a volatile backdrop, move up and down the balance sheet. So not surprisingly, even when primary market slows, we still have the ability to deploy pretty actively, and that's showing up in the numbers.

Great, thank you guys.

Thanks Craig.

Thank you. We now have Alex Blostein of Goldman Sachs. You may proceed with your question.

Hi, good morning everybody, thanks for the question as well. I wanted to start off with a question around retail strategy. AREITs one and two, I guess, seen pretty good flows in the quarter at about $1 billion. We've obviously seen a slowdown from some of the larger peers. I think you've been adding distribution partners over the last couple of quarters? So, help me maybe dissect a little bit how much of the continued strength in fundraising for those vehicles has been a function of new platforms versus same-store sales generally remaining pretty strong. And then, I guess, as a follow-up to that, what are, the sort of near-term plans for the further sort of expansion in the retail channel?

Sure, thanks, Alex. So good news, bad news is that the two non-traded REITs raised $842 million in the quarter, which was up from $818 million last quarter. And I think also importantly, those inflows came against some fairly insignificant outflows, which is what we saw last quarter as well. I think quarterly redemptions this quarter were about $85 million. And so I think we are outperforming the peer set, both in terms of the inflow and the net. That's the good news. The bad news, if you want to call it that, is we're actually still doing that with our existing selling group so all of that is same-store. As we talked about in the prepared remarks, we expect to add one-wire platform for the non-traded REITs by the end of the year, and have a pipeline of other partners that we would expect to bring online into the new year.

Great, that's helpful, thanks Mike. And then my...

Sorry, you just asked about product expansion. I think folks are aware we have our PMF product, which we referenced in the script as well. We're beginning to see inflows accelerate there. And we are in registration, as people know, with ASIF, our private BDC, which we are hopeful will be well received given our private credit franchise.

Awesome, thanks for that. My follow-up was for Jarrod just thinking through the follow-up to Craig's question around the European waterfall. Obviously, that will create a bit of more recurring nature to the overall earnings base for Ares in addition to, obviously, very strong growth in management fees in FRE. How does that inform your dividend philosophy? I think, for now, the dividend is largely tied to the direction of fee-related earnings growth? But with lots of visibility into realized income or realized performance fees from European waterfall style funds, should we be thinking that your approach to dividend will sort of include that? In other words, the payout, as a percentage of FRE, could ultimately increase and the direction of travel is meaningfully higher from here?

It's something we'll continue to monitor, certainly. However, as you know, being a balance sheet like manager, we pride ourselves on our flexibility and our ability to take advantage of different markets and opportunities. And I wouldn't want to guess what might be available to us as these really come on in earnest, and I'd want to maintain our flexibility in regards to that. So if there was an acquisition opportunity or organic growth opportunity that, that cash would be well suited to investing, I wouldn't want to take that opportunity away. But it's certainly something that we'll always be aware of as we're mapping out what our dividend will be.

All right, we'll stay tuned. Thank you.

Thank you. We now have Patrick Davitt of Autonomous Research. Please go ahead when you are ready Patrick.

Hi, good morning everyone. You mentioned the $1.2 billion of organic growth from the insurance platform. They just launched annuity writing there in June. So is that a good kind of baseline to think about the run rate organic growth from that annuity writing or do you expect it to continue to ramp from here?

My expectation is it will ramp from there. To remind folks, we talked at our Investor Day that prior to being onboarded onto the Ares platform, that distribution engine was originating close to $2 billion per year organic. We're obviously quickly getting to that level, but I think we went into this endeavor with a view that as we scale that we would be able to do better than that. So I think it is a very exciting baseline given how early we are in the underwriting [maneuvers] having started only at the end of June, but my hope and expectation would be that as we continue to scale the capital base, the speed of those numbers could grow.

Great helpful. And a quick follow-up, you mentioned the non-traded REIT accrual of $159 million. Are there any other chunky 4Q crystallizations you have - visibility on other than that in the European waterfall you pointed out?

Yes, to be clear, the REITs are in [FRPR], and they're not included in our accrual. The other amount that comes into FRPR - is the perpetual capital related to the credit funds. We have about $10 billion of AUM, and we had about $10 billion last year as well. There's a couple of factors to take into consideration there, which is, you have the rising interest rates that benefit it, but credit spreads, as they widen within a given year, they can be a little bit of a drag. So I think, all in, when you consider what we have from the REITs and what you have from the credit side, that we'd expect that number to be slightly larger than it was last year. But overall, there's a lot of inputs that will go into it in the fourth quarter in terms of what credit spreads are doing, what interest rates do and as well as the fair value of the assets of the REIT. And in terms of the realization that we had, the realization that we had - the realization that we had or that we mentioned there of $40 million, that's really related to our European-style waterfall that pay periodically in order to make certain tax payments that are required by those funds. It's not the start of the European waterfall in earnest, which we really look to 2023 and 2024 for.

Got it, very helpful, thank you.

Thank you, Patrick. Your next question comes from Benjamin Budish from Barclays. Please go ahead when you are ready.

Hi guys, thanks so much for taking question. I just wanted to check on the $45 billion you mentioned from the flagship fund rating cycle. I think last quarter you talked about $30 billion coming from just four funds. Does the $45 billion include like an upsized expectation for the four or is that just you're now sort of including a broader expectation from more strategies?

Yes, I think given the attractiveness of the deployment environment and the demand that we're seeing from our investors for some of our core credit fund, that's a reflection that we've actually pulled one of our flagships up in the fundraising queue to raise it earlier than we had originally anticipated.

Okay, great, that's very helpful. And, then I kind of wanted to follow-up on the retail side. Can you maybe talk about -- it sounds like a flows are kind of continue really nicely. What's the sort of competitive environment like -- I'm kind of thinking specifically like the wirehouses where you're already distributed; how often are advisors deciding between Ares fund versus competitor, how much exclusivity is there? Just how should we kind of think about that?

Yes, I think the good news is, the market is still fairly fragmented, but in my opinion beginning to consolidate, and it's consolidating with managers like Ares who have a couple of things going for them; one, a broad and diverse set of products that's attractive to the financial advisor and retail community; two, strong performance in those products; three, a commitment to distribution in education in that channel as evidenced by the 130 plus people that we have in and around our Wealth Management Solutions business; and four is a deep and long-standing relationship with the street and the wire platforms having raised and manage things like ARCC and ACRE and all work institutional funds that already sit in the hands of a lot of high-net worth clients. So there are others that have those competitive strengths but they are few and far between. And if you look at the published results of whose taking share, I think we are slowly creeping up the lead tables at the top in terms of those that are seeing incremental flows. I can't tell you exactly to be honest how an adviser in the field is choosing to put their client into these products, whether they're choosing an Ares real estate product alongside another competitive product, or they're choosing one. But if you look at the flows, they are broad-based, they are deepening. We're actually seeing the number of advisers that we're doing business with increasing. And we're actually seeing the average ticket increase. So the numbers would tell you that, even if the advisers choosing between competitive product, that we are actually doing business with more advisers to a larger dollar amount per adviser.

Okay, great. Thanks so much for taking my questions.

Thank you.

We now have Brian McKenna with JMP Securities. Your line is now open.

Great, thanks. So the closing of your second special opportunities fund is very timely. So $7 billion of dry powder --- $7 billion of dry powder, what specific areas of the market are most interesting right now to invest into for this fund? And then returns for the first vintage are quite impressive with the 26% net IRR. So what's the expectation for returns in the second fund?

Hi Brian, we're fortunate that Scott Graves who runs that product is here with us, so I'll let him answer that.

Good morning. The market for the ASOF strategy is obviously very attractive. It's a strategy which will pivot on a relative value basis between what we're seeing in private market debt and equity hybrid securities against the backdrop of secondary market solutions at a discount. That relative value bounces back and forth, and it's done in multiple times this year. In the first quarter, private markets were clearly our focus, now is where we refined it at around the value. We obviously saw a significant trade-off in secondary fixed income, accelerated into that market in the second-quarter, saw the rally coming off of the second quarter earnings, pivoted back to privates, now we're pivoting back to publics. So it tends to move back and forth. But this strategy is really ideal for what we refer to as vintage diversification. So when you see other more traditional illiquid alternative asset strategies decelerate in deployment due to a lack of transaction volume, this is a strategy which can accelerate into that market and create that vintage diversification.

Great, thank you.

Thank you. We now have Gerald O'Hara of Jefferies. Your line is now open.

Great. Thanks and good morning folks. Appreciate the color on the future pipeline, whole host of funds coming to market. Perhaps, you can give us a little bit of incremental color on how we should think about the FRE margin from there. Is it going to be a function of those raised and deployed and invested? Is there any sort of possibility of kind of a step-function there as one or multiple funds kind of go-live in their investment cycle? Or anything that you could perhaps give us some increment incremental context, that would be helpful.

Sure, I'll remind you, and we really looked into this year, like I said, at the beginning of the year, that this was a year we'd be making investments in our people and our technology so that we could prepare for what we knew was coming pretty large fund raise cycle. So ultimately that fundraise cycle will take anywhere from a year in that range, and we'll still be hiring behind that. And then as we deploy that, the majority of those funds are earning management fees upon deployment. So that will, as you've noted, allow us to accelerate our margins. So if you look at and what we've laid out as our margin target of 45% plus. That's why we reaffirmed that in the script, and if we feel comfortable there, as this is an accelerant to that; the ability to deploy these funds will certainly be very margin-accretive.

Jarrod here. Just to clarify that, if you look at which funds we referenced were in that pipeline, the bulk of those are our largest credit funds which pay on deployment. But one that is not is our seventh corporate private equity fund which pays on committed. So to the extent that that is successful in 2023 in raising, you will see a step-function margin improvement in that particular part of the business.

Okay, that's helpful. Thank you. And then just as a follow up, I just kind of reading headlines this morning, you kind of see the term golden age for private credit. And clearly, you all are at the forefront, but as I sort of think about to put myself in the shoes of perhaps and the dominant or pension plan allocator who's looking at public credits that are perceived at least with potentially less risk and now higher yield, how are the competitive dynamics kind of shaking out with your private credit opportunities versus other opportunities or fixed income products in the market?

Yes, there's a lot to unpack there. So I'm going to try to be succinct, and if you want to drill down on any particular standing. First, you have to differentiate between performance of fixed rate, fixed income within traditional investor portfolios in the form of sovereign debt, investment grade debt, and high-yield debt. And obviously, when rates are going up, you have the dual impact of value declines in the existing book and increasing pressures at the company-level. So I think there's a, lot of folks that are just dealing with the rapid decline in values that has come with the rapid rise in rates. That actually makes private credit and other floating rate fixed income product all the more valuable and important to start to recoup some of those losses at this point in the rate cycle. So I think, first, I just want to make sure that we're differentiating that. The positioning between private credit and traditional fixed income is often balancing act. I think right now they're having two totally different experiences on either side of the house in terms of the rate move. In terms of private credit and its competitive positioning, and I think Scott hinted at this. Right now if you look at the traditional markets and their ability to provide liquidity to private companies, I don't know if we have a golden age of private credit going on, but we have a golden age in some respects of private markets in the sense that we have more companies in the private markets than we ever had before. They're staying private longer. Public markets are getting more and more concentrated. I think people are reevaluating the value of liquidity in the public markets. So there's more capital that is finding its way into those private markets and that maybe, I didn't see the headline what people are referring to. So again, that structural shift in the markets in the economy, right now the public markets for all intents and purposes are not opened as a provider of capital to growing private companies. The leveraged loan market is largely unavailable. The high yield market is largely unavailable. So from a competitive positioning standpoint, having the amount of dry powder that we have across the platform I think we feel great about the competitive positioning. We're in a position now to be one, if not the only type of liquidity providers that are active in a market like this.

Okay, that's perfect. Thanks for the color.

Thank you. We now have Finian O'Shea of Wells Fargo Securities.

Hi, good afternoon or good morning. Sorry, another one on deployment. We're seeing headlines of a move back toward all-cash buyouts. Is this something you're seeing more widely in middle-market private equity? And understanding that a lot of these companies will eventually borrow or lever up, is there an impact from that that is more or less favorable to direct lending?

Yes, I don't know if I would say that based on what we're seeing, and Mitch and Kipp are here with me as well, that we're seeing all-cash buyouts in the pipeline. I think what you may be referring to is, if you just think about what's going on in the private equity universe. Valuation multiples are obviously compressing, given the change in discount rate and against the rise in interest rates. There's a lot of price discovery happening in the market, in the primary market in terms of where transactions will clear. And I think the leverage providers like us have been pretty disciplined around where we're willing to attach from a leverage standpoint and at what price and what terms. So to the extent that there is a disconnect between the leverage finance markets and where a private equity buyer would like to clear a transaction, I think they will use incremental cash to bridge it. So maybe the way to think about is not all-cash but higher cash contribution in order to clear quality transaction in today's market, but I don't think that we're seeing a move to all cash. But to your point, is it good for private credit, I think the answer again in a market like this where liquidity sources are scarce, limited, and we're one of the few that have scale and flexibility, I think it's going to be a pretty good vintage course.

Thanks, that's helpful. Just a small follow. I think you mentioned the base rate impact would be another approximately 8% improvement for the fourth-quarter for performance. Is that the extent of it in the context of the today's LIBOR curve, or is there still a visible uptick into next year?

Yes, so just to clarify that, 8% was just reciting what Kipp and Mitch and others have talked about on the ARCC call, which was all else being equal if we just enjoyed the in-place rise in rates, income would have gone up 8%. So the answer is, there is absolutely more to go to the extent that we have continued rate increases which we all expect. And the reason that we talked about the 8% is the way that these flowed through the portfolio companies and then ultimately into our portfolios is it backward-looking averages, and so it takes a couple of months to get the full effect of any rate increase. So if we maintain the current trajectory rate increases, you'll continue to see that phenomenon. And I think as Jarrod mentioned, most of the incentive fees that we earn off of our floating rate credit funds are against fixed rate hurdles. And so not only are we delivering higher ROE in distributions at the portfolio level to our investors, but it has a meaningful impact on the incentive fee-generating opportunity that we have in our credit book.

Thank you.

Thank you. We now have Adam Beatty with UBS. Your line is now open.

Thank you and good morning. Couple of follow-ups on Aspida. I appreciate the comments earlier around organic growth and the kind of sizing that out. Just wanted to get your thoughts on how you're thinking about potential inorganic opportunities there, number-one, from what you're seeing in the marketplace and also, number two, from a perspective of balance sheet capacity? Thank you.

Sure. So the way that we set up Aspida intentionally was to have side-by-side pillars of our organic annuities and life business next to our Aspida reinsurance business which gives us the opportunity to look at organic annuities distribution, flow reinsurance, and then inorganic opportunities all side-by-side. And what we are trying to do there is make sure that we understand the ROEs that we can generate in each of those opportunities as we use our capital. I think the good news is given the market right now that we're in, we are generating higher ROEs. I think that we originally underwrote just given where we're able to price liabilities against the assets that we're generating. So our view right now is all three of those are attractive and scaling. And the inorganic opportunities we've talked about are pretty significant and growing. We continue to see traditional insurance companies simplify their business models and look for either reinsurance partners or look to sales of portions of their business to folks like Aspida, so I think the inorganic opportunities as good as we've seen. In terms of balance sheet capacity, I would maybe just remind you, our view as a balance sheet light asset managers that we have been growing that platform largely with third party capital. And so while we made a significant upfront investment to get all the capabilities and talent around that business, the scaling from that formation moment has been largely done with third-party capital, and I would expect that to continue.

That's great, thank you Mike. Just one follow-up on that around the changing rate regime. Do you expect that to change the opportunities for inorganic growth one-way or the other? Thanks.

Yes, I do. I think there are a number of catalysts that will bring assets into the market. The changing rate regime is one of them. So like I said. I would expect that the pipeline of inorganic will largely pickup over time, rates being one of the drivers.

Okay, super. That's all from me today. Thank you.

Great. Thank you.

[Operator Instructions] We have the next question on the line from Rufus Hone of BMO Capital Markets. May proceed with your question.

Great. Good morning. Thanks very much. I wanted to come back to some of the comments you made around private credit. And I was wondering whether you're seeing any differentiation between the U.S. and European direct lending businesses in terms of the fundamental performance of the company's you lend to. And the credit metrics you're seeing across the different geographies seen from the ARCC call that the U.S. business hasn't seen much change in recent months, and I'm just wondering if you feel the same about Europe? And more generally, when do you expect some credit deterioration to start to come through? Thank you.

Sure. So the simple answer is, as we sit here today we are not seeing material, credit weakness in any of our credit portfolio. So you talked about ARCC. On our most recent earnings call, we highlighted that nonaccruals were low at 1.6% of the portfolio at cost, meaningfully lower at fair value. And if you look at that Company, it has almost 20-year history, the 10-year average was about 2.5%. If you look at our European direct lending investments, actually stronger fundamental performance in terms of interest coverage, leverage and some underlying metrics just based on how those portfolios were positioned going into the current environment. So again, very low nonaccruals and strong performance. And we see that in the liquid markets as well, right? If you look at coverage levels in the high-grade market, I think we're pushing 10 to 11 times interest coverage in high grade. We're at five to six times interest coverage in the high-yield market, well in excess of two times coverage in the loan market. So there's a lot to be concerned about on the forward trajectory for the global economy. But these portfolios are going into this uncertain period with a lot of fundamental strength and just given the interest rate environment that we were in, while the rate of change is significant, the absolute level of interest rates, at least until this point, has not shown up in any kind of portfolio distress. When will we see it you asked, I wish I had a perfect crystal ball to tell you. I do think that the European economies will have a different experience just given the structure of the economy, and how they're experiencing inflation versus how we are. But I'm not as anxious maybe as some of the public markets are indicating we should be just given the strength of the underwriting. And as I said in our prepared remarks, the bulk of these assets are controlled at the top half of the capital structure with a significant amount of structural protection around them and a lot of equity subordination from institutional equity providers that is there to help these companies get through uncertain times. So I think we are appreciative that we all should expect that it's going to become more challenging before it becomes less challenging. But going in with a lot of strength, and we're not seeing a lot of differentiation right now between the U.S. and Europe.

Thank you.

Thank you. We now have Michael Cyprys of Morgan Stanley. Your line is now open.

Great, hi good morning, and thanks for squeezing me in. Just wanted to circle back on the portfolio marks that you guys took in the quarter, I was hoping you might be able to elaborate a bit on what some of the drivers were of the positive marks that you had in real estate and PE in a period where markets were broadly down, and we had seen some others take some markdowns on their books that looked pretty strong for you guys? And then in credit, it seemed a bit more mix. Some of your credit strategies were marked up, but then when I look at the AUM role for credit that was negative there. So I was hoping you could maybe unpack what was positive versus what was negative and markdown in credit?

Yes, I think we said it in the prepared remarks, I don't think that there's that much more to drill down on the - if you look at private equity in the ACOF funds, what that's a reflection of is the sectors that we are invested in, including energy, our higher growth, higher return on invested capital type businesses. And so, the pace of EBITDA growth across those portfolios, which was in the mid to high single-digits, outpaced the deterioration in valuation multiple. Same thing for our real estate business, as we talked about, given our rigorous focus on industrial and multifamily, we continue to see very significant increases in rents and lease rates, continue to see very healthy occupancy rates. So the fundamental performance continues to outpace any deterioration in value that's being caused by a shift in rates. In terms of credit, again, most of the credit portfolio, as you saw this with ARCC. Are modestly down on book value, largely as a reflection of the rate environment, but again, are growing through that. And don't forget the value of current income in this rate environment. So the way to think about the attractiveness of the private credit markets is, if you see a 300-basis-point increase in base rates, 150 to 200 basis point increase in spreads, you're accumulating a significant amount of excess return relative to where you were six to nine months ago. And so even if you are absorbing a decline in your NAV of 1% to 2%, the all-in return in those portfolios continues to be meaningfully positive, which is why I think it's so attractive to investors and is proving to be quite durable. So we're not really seeing significant underperformance on the credit side of the house.

Great, and just a follow-up. I know you guys have flagged the significant floating rate exposure that you guys have on the credit book. But just any help on how you think about the credit impact to those issuers of having to pay a lot more in terms of interest income? How are they protecting themselves? How much of that is hedged out on that side? How you view that as a potential credit negative event for the issuer? And what happens with those hedges rolling off over time? How do you think about that and protect those issuers?

Sure, so a couple of comments here. One, we obviously are very actively engaged with these portfolio companies. One of the benefits of being in the private credit markets the way that we are as the lead agent lead investor, we're highly engaged, so yes, there is a fair amount of hedging that is going on in the underlying portfolios. Those will eventually roll off and/or become less effective than they were maybe six to nine months ago. But there are effective hedges in place that is muting the impact from a coverage standpoint at the portfolio company level. I just want to take a step back because usually when we're talking about future risk of recession and default rates, we're talking about it coming off of, to my earlier comment, much weaker fundamental performance and not really attributing it to a rise in rates. So one way to think about this is all of the value of the rate increases that is theoretically challenging the companies is coming to us. And now everybody is waiting to see if earnings decline. But as of now, all of that "value transfer" has come to us as a private credit owner, whereas in past cycles, you would have the opposite, that the bulk of the decline in credit coverage would be coming from earnings degradation that would be harmful to us as well as harmful to the equity. So now we get to go into this cycle to the extent that the company gets somewhat challenged from the combination of continued rate increases and earnings declines where we have the flexibility to work with our equity partners in those portfolios to resolve the liquidity needs of the company. And obviously, we've been doing this for a long time. That could take the form of increased interest, but increased noncash interest. It could take the form of structural accommodations. It could take the form of allowing cash to come into the business in the form of equity or subordinated debt below us. So there are a lot of tools that you will use as you're transitioning. But I think it's important that people appreciate, through the lens of the private credit, most of that value and yours to the benefit of the private credit portion of the capital stack sitting at the top half of the balance sheet. And is not that it's a good thing, per se, for the company, but it is a transfer of value from the company to the credit or from the equity to the credit. And that's generally how this has played out in past cycles as well. But we're still a long way from that. Like I said, there's a pretty significant amount of broad-based health across the portfolios. And while the rate increases have been significant, this market has thrived and flourished in a 5% base rate requirement before. So I think people need to have some historical perspective as well.

And what portion would you say is hedged or protected at the portfolio company level?

I think in the U.S. book, it's about 30%. And in the European book, it's significantly higher than that.

Great, thank you.

Sure.

Thank you. I would now like to hand the call back to Michael Arougheti for some closing comments.

I don't think that we have any other event to say thank you for your continued support and your time today, and we hope that you have a wonderful end of the year and look forward to catching up around our fourth quarter earnings in the New Year.

Thank you for joining. That does conclude today's call. If you missed any part of today's call, an archived replay will be available through November 28, 2022, to domestic callers by dialing +1 866-813-9403, and to international coolers by dialing +44 204-525-0658. For all replays, please reference the access code 492022. An archived replay will be available through November on the webcast link located on the homepage of the Investor Resources section of our website.