Ares Management Corp (ARES) 2014 Q3 法說會逐字稿

Welcome to the Ares Management LP's third quarter Earnings Conference Call.

(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, Ben 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 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 in Ares Management LP.

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 principals.

In addition, these measures may not be comparable to similarly titled measures used by other companies. Please refer to our Earnings Release and Form 10Q for definitions and reconciliations of these measures to the most directly comparable GAAP measures.

I would like to remind you that nothing on this call constitutes an offer to sell or a 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 aresmgmt.com which we will refer to during our call today.

I will now turn the call over to Mr. Tony Ressler, Ares' 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 believed 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 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 Funds or EIF. We have had a longstanding relationship with and a great admiration for EIF through our direct lending, energy and power team.

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 flowing 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 as importantly, will add real expertise in an attractive and growing asset class with strategic importance and barriers to entry. We expect this transaction will be accretive to our unitholders and beneficial for our fund investors.

Second, in September, we increased our cash position by accessing the high-grade notes market and successfully issued $250 million in ten-year notes at an attractive cost of approximately 4%. The notes issuance provides balance sheet diversification and enables us to pursue our strategic growth objectives, including the EIF acquisition, with long-term attractive financing.

Finally, with respect to our fund raising, our growing brand and expanding platform capabilities are resonating with a great number of new and existing investors. So far to date in 2014, we have raised over $13 billion in gross assets across more than 30 different funds from over 100 institutional investors. We have always said that assets follow performance and we are succeeding at attracting new capital to a greater extent as we expand our marketing across channels and place a greater emphasis on cross-selling our platform to our existing investor base.

So what does all this mean for our public unitholders? Our goal for our unitholders continues to be to provide an attractive dividend supported primarily by recurring and growing fee-related earnings. As Mike will discuss shortly, we are making progress growing our quarterly fee-related earnings and we will continue to leverage our existing infrastructure and strong performance to raise significant AUM.

I will now turn the call over to our President, Michael Arougheti, to provide some highlights on our recent results and performance.

Great, thanks, Tony. Let me begin by touching on some general themes and highlights that will hopefully 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's 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 diversified 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 are 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 new funds paid on commitments. As a reminder, we have about $9.4 billion of AUM eligible for management fees upon deployment representing about $85 million in potential future annual management fees.

Despite the attractive growth in our fee-related earnings, our third quarter ENI, or economic net income, after tax per unit was roughly flat with the prior quarter of $0.32 versus $0.33 as our performance- related earnings were impacted by loan and high-yield market volatility. Despite this decline, remember that we at Ares embrace market volatility since it provides us with the ability to opportunistically deploy capital at superior values and to produce improved risk-adjusted returns.

This market volatility had no meaningful impact on our realization activity and therefore, we generated a higher and more normalized level of cash distributable earnings in the third quarter compared to the prior quarter. This translated into a $0.24 per common unit distribution compared to $0.18 in the second quarter.

At recent trading levels, the annualized dividend yield, using our Q3 2014 dividend is around 6%. We continued to anticipate paying out between 80% and 90% of our distributable earnings in our dividend.

Of course, Tony touched on the other two recent highlights in the quarter. Our successful $250 million high grade notes issuance and recently announced agreement to acquire EIF, and Dan will provide a little bit more detail on both of those transactions in a minute.

If you can now turn to Slide 4 in the deck, I'll touch on our collective capital-raising activities during the third quarter along with the potential future fund-raising activity for each group. Starting with tradable credit, we raised about $1.5 billion in our long only strategies driven by our largest ever CLO of $1.26 billion. The CLO market remains an attractive avenue for growth and we enjoy a leading position in that market segment.

Also, we are well on our way toward raising our fourth special- situations fund with a first closing of $722 million towards our goal of at least $1 billion, a very sizeable increase over our third special-sits fund of $501 million. We expect to start earning fees on this fund with deployment beginning early next year. We continue to be well-positioned for new funds in our structured credit and credit opportunity strategies.

Within direct lending, our activity was driven by the execution of a $258 million follow-on equity offering for ARCC, our Business Development Company. We expect to raise additional fund capital for our European direct lending strategy after we fully invest our second fund which is over 50% invested. We continue to like the favorable market dynamics in Europe as banks retrench from certain segments of the market and as many of you know we enjoy market leadership in the European direct-lending space currently with over $5 billion of AUM with four office locations and an operating history there since 2007.

In real estate, our fourth European opportunities and our eighth US value-add fund had approximately $600 million in additional closings in the third quarter. We expect to hold final closings by year-end for both of these funds at or above their collective targets of $1.25 billion and $750 million respectively. As of September 30, our European fund has closed on just over $1 billion and our US fund had over $600 million in total commitments.

I'd like to point out that since the closing of the area acquisition in the third quarter of 2013, we've raised a total of $2 billion in new real estate AUM, highlighting our opportunity to make asset manager acquisitions and then catalyze future growth. Going forward, we've begun marketing an opportunistic fund in the US and we continue to work on a wide range of real estate private debt mandates. Within our private equity group, next year we plan to raise additional growth capital for our existing Asian-focused strategy as well as our new energy infrastructure offering, assuming a closing of the EIF transaction.

So lastly, before I turn the call over to Dan, let me provide our views on the investing environment. As you all know, we continue to be in a prolonged period of significant liquidity in the credit markets. This increased liquidity has encouraged risky behavior in many markets.

That said, these technical challenges need to be considered in the context of sound underlying fundamental performance and generally we're seeing strong period-over-period performance in our underlying investment portfolios, a natural deleveraging and an overall healthy environment for realizations. We've also taken advantage of the market liquidity to strengthen the right-hand side of our balance sheet.

So while this excess liquidity can at times present challenges, we are leveraging our advantages in origination across a broad market landscape and exercising a high degree of selectivity to find good opportunities among franchise businesses and high-quality assets. During the third quarter, we invested $3.7 billion across our four businesses including over $1.5 billion in our long-only strategy, mostly in floating rate loans.

Our private equity group invested approximately $743 million across three new platform portfolio companies in the US and Europe and our funds within our direct lending group in the US deployed $717 million. We also deployed another $343 million in European direct lending and just under $200 million in alternative credit. Across the US and Europe, we invested more than $150 million in real estate equity.

Going forward, we expect the increased market volatility to create better opportunities for us to deploy capital in high-quality companies and properties at attractive prices. We are prepared for a potential rise in interest rates in 2015 and we've positioned or credit portfolios with limited durations and with mostly floating rate loans. In fact, as a reminder, about 80% of our credit assets across the entire Ares platform are on floating-rate assets that are well- positioned for a potential rise in interest rates.

And now for a more detailed review of our earnings and financial position, I'll turn the call over to Dan Nguyen, our CFO. Dan?

Thank you, Mike. For those referencing our third quarter earnings presentation, I will touch on data contained on Slide 13 through 16. As Mike stated, we continue to enjoy solid management fee growth from a balanced 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 with our corresponding 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 one-time 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 [releases] and the deployment of our significant capital, both current and new, against a slower growth rate in expenses.

Our performance-related earnings were lower due to the weaker market pricing toward the end of third quarter compared to the second quarter of 2014. Third quarter performance-related earnings were $30.8 million compared to $40 million in the second quarter. The decline was attributable to lower PRE and our tradable credit and real estate groups partially offset by increased PRE and 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 assess pricing, we believe our performance fees which are weighted toward the credit side of the capital spectrum should generally exhibit lower volatility.

Our third quarter pretax economic income of $72.1 million was slightly below the $75.1 million we generated for the second quarter. The low ENI primarily reflected higher perform-related earnings for our tradable credit and real estate groups in the second quarter amid moderately stronger market conditions. On a per-unit basis our economic net income, net of tax, was $0.32 compared to $0.33 for the second quarter which is presented on the pro forma basis for the IPO.

Our distributable earnings rebounded to the historical norms during the third quarter was $65.3 million compared to $48.6 million in the second quarter. In addition to the growth in our fee-related earnings, we realized net performance fees of $26.4 million during the third quarter of 2014 primarily within the tradable credit as we liquidated an older opportunistic loan fund and [pre-ordered] CLOs.

We also generate net realized investment income of $11.2 million from our investment portfolio. The performance of our investment portfolio has been strong with a year-to-date return of 16.1% and an annualized return since inception of 13.2%.

Now let me move to distributions. Third quarter distributable earnings allocable to the 38% attributable to the common unitholders were $0.26 per common unit net of tax. This morning, we announced a distribution of $0.24 per common unit for the third quarter representing a payout of approximately 90% of the distributable earnings.

As Mike stated, we strengthened our balance sheet through the third quarter by terming out our debt outstanding with 4% fixed rate, 10-year unsecured debt capital. We continue to have a $1 billion-plus revolving credit facility in place for future capital needs. Following this notes offering, we have pro forma cash on the balance sheet of approximately $158 million corresponding to approximately $1.2 billion of available capital.

Moving along to the rest of our balance sheet, as of September 30, we had over $600 million in investments, many of which are in generally higher returning strategies. We believe these investments provide now an attractive source of income for our unitholders over time. In addition, our net performance fee receivables stood at approximately $167 million at the end of the quarter.

Now let me close with some additional details behind the EIF transaction. Before factoring in any potential contingent consideration which is based solely on future performance, we plan to finance the initial closing consideration primarily with cash, along with equity interest, exchangeable into an aggregate of up to 1.6 million common units.

Upon closing, we will begin to generate fee-related earnings from the management of approximately $4 billion in fee-earning AUM that we will acquire as part of this transaction. It is expected that this transaction will be immediately accretive to our earning upon closing, which is expected by the end of the fourth quarter subject to regulatory approval, investor consent and other customary closing condition.

Now we'll turn it back to Mike for some closing thoughts.

Great. Thanks, Dan. So in closing, we believe that we are well-positioned for growth in the year ahead, given our expanding platform, our significant fund- raising pipeline, our long lived and diversified capital base, and our 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 30, and the ability to drive growth in management fees and FRE as we invest a 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)

Our first question comes from Ken Worthington of JPMorgan.

Hi, good afternoon. This is Amanda Yao for Ken Worthington. We've seen 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?

Yes, I'm 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 were encouraged by the volatility, but speaking to some of the excess liquidity in the market, that window closed quite 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 wide and reprice. But the reality is I think we wish it would have lasted a little bit longer to take more advantage of that. And maybe for tradable credit specifically.

I'll turn it over to Greg for some color on that.

Sure, thanks, Mike. I agree.

We did use the opportunity to buy some of the franchise companies that we believe in, 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 is that the trading desks at the banks were more marking the market down as compared to actually transacting a significant amount of capital there.

Okay, thank you for the color there. Separately -- go ahead?

Please.

Okay, so separately with Bell growth leading Pemco and a lot of money in motion, is Ares seeing any opportunities to capture some of the expected institutional-bond-related redemptions in the credit- based products?

We continue to have a very robust pipeline of conversations with pension funds across the US that are -- look to reallocate capital from traditional fixed income and long-only products into some of our more dynamically oriented funds, and so that dialogue 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 is money moving around the market, but I think a lot of it is people are obviously trying to position for the increased market volatility, and we're definitely a beneficiary of that.

Okay, thank you for taking my questions.

The next question comes from Chris Harris of Wells Fargo.

Thanks. Hello. 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 have any incentive creating AUM that they manage?

Yes, 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 we will be using to fund a portion of the purchase price.

Vis-a-vis the economics, a couple comments I will make are we do expect it to be accretive upon closing, given the installed base of about $4 billion of fee-paying AUM in place. And we do hope and expect to be continuing to catalyze the growth of that platform early in 2015 with some new fund raises 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 and really fills in what is an already broad and strong product offering in energy for Ares.

What many people may not appreciate is today, prior to the EIF acquisition across direct lending, private equity and tradable credit we manage in excess of $3 billion in energy and energy-related assets, and prior to the acquisition that encompasses everything from syndicated bank loans in high yield down through to the private loans 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. This are very long-dated, hard assets, tend to come with midteens to low 20%s-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.

Okay, perfect, very helpful. 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 sloshing around. Just wondering, has that gotten worse over the last couple of quarters? What I mean by that is are there more -- is there more liquidity floating around the system than there was not too long ago? And then related to that, are you seeing that across all of your verticals, or are there specific pockets where you guys might be a little bit more aggressive, just because there's less competitors there?

Sure. Why don't I answer the second part first, and then I can let Greg or Bennett or Tony and others chime in as to what they're observing. The nice thing about the Ares' platform is that we have such a broad diversity of fund products in different asset classes and different geographies, debt and equity, liquid and illiquid. So clearly, what 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 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 premia, 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 the fundamentals are strong, try to use liquidity to your advantage in terms of seeing incremental deal flow, maybe resetting your liabilities and your leverage. And then just be highly selective. But I think the good news is, plenty of good things to continue to invest in.

Thank you.

I'm getting nods that they agree.

The next question comes from Doug [Merwerper] of SunTrust.

Hi, good afternoon or good morning, depending on your time zone. Thanks for your overview of EIF. Most of my questions have been answered on that front.

Moving over geographically, Europe actually continues to be pretty interesting. It seems like there's a ray of sunshine and then it dips back down and then so on. The euro is obviously getting weaker, which put a dent 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 your view of the risk profile? And I know Europe is a big place, especially northern versus southern, but there seems to be a lot going on there and you have a pretty big footprint. And I'm just wondering how you're reacting to this, and whether you think it's an opportunity or something that calls for more caution?

I think it's both an opportunity and in certain jurisdictions and 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 in origination capabilities we have there. And tradable credit, we have been quite prolific raisers of capital to attack both the primary and secondary market opportunities. 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, surprisingly, makes us one of the first people to really move into that market in a meaningful way. And with 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 touch on some of the things we're seeing in tradable credit, I think it will be a good indication of the breadth of opportunity that we're seeing there.

Sure. Thanks. And we're seeing two different markets, if you will, on the alternative side or our 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 of banks' balance sheets. That is a trend that we see that started a year or so ago where we saw very healthy pipeline and diverse pipeline. And we expect to continue to see that flow over the course of the next three-plus years as the banks continue to lighten up on assets to fix their balance sheets.

And on the more liquid side of things, it's very specific as to where we see opportunity and where we see risk premia not being sufficient for the opportunities. So generally on a broad-bus statement I would say that companies that are internally focused to the European consumer are a little bit less interesting today as compared to the number of, and there are many, European assets and companies that are more globally focused and more export focused, where we see real opportunity in terms of mispricing and opportunities for entry points.

I think it's possible, and 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 as what we're seeing in both private equity and real estate, we are investing and growing substantially in the European market despite, if you will, the concern about GDP growth that we have as a firm.

Okay, thanks very much for that answer. That's all my questions.

The next question will come from Mark Irizarry of Goldman Sachs.

Great, thanks. Tony, I just want to go back to all of the capital you've raised since the IPO, and you mentioned bringing on new LPs. Any update in terms of the mix of your LPs on a global basis? Where are you seeing some traction from new investors coming in? And overall how you see the opportunity from US versus non-US LPs? Thanks.

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 to fund raising, there's 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. Strangely enough, even with US institutions, with insurance companies in the insurance industry generally, where they're looking at many of our products, particularly in the real estate lending and the structured credit arenas.

So, yes, there's no doubt Europe, there's no doubt the insurance industry and, frankly, in Asia, as well, I think it's fair to say we're known a little bit in the Gulf. But all that being said, there's no doubt that we're seeing pretty consistent growth across our global marketing efforts, and I do think that's been a benefit or spurred by the IPO. People can check on us more easily.

One quick follow-on statistic that 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 relationships.

That's helpful, thanks. And then, Mike, just on EIF, it sounds like we have to wait and see for more details on the transaction. But just curious, is this a -- when we do see some of the detail there, is this 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? Thanks.

Yes, 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 than 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.

I think we would add there's a whole lot -- I'm sorry, this is Tony Ressler. We would add there's 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 in our private equity business, in our Asian growth capital business, in our special- situations funds and tradable credit, in our real estate funds in both the US and Europe, having, if you will, an additional expertise in the energy infrastructure asset class that we've been lending to.

o 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 of the appropriate boxes in what we look for.

Okay, great, thanks.

Thanks Marc.

The next question will come from Robert Lee of KBW.

Hi, good morning. This is actually [Anne Dye] 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 earns fees as it gets deployed gradually and how much of it is in a fund where it needs to get turned on and maybe that's a quicker turnover and we might see more of a spike and maybe some catch-up fees in management fees? I'm really trying to get visibility around the topography of those assets.

Sure. 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 earning 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 commitment, 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 balance. 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 that those we are getting paid on commitments. So the bulk of it is actually going to be deployment- related as you can see here.

Okay, great thanks. And going to this quarter, just a quick question about the placement fees and underwriting cost line item, and also depreciation amortization. They seem to run a bit high this quarter. And I understand those can bounce 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?

Yes, sure. This is Dan Nguyen. You are correct. This quarter is -- that line item seems to be a little bit higher than what it was in the second quarter, simply because placement fee, as you know, we with the European real estate four 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 the next, but, again as you can see from the definition of what we disclosed in our definition fee-related earnings, we don't expect this to be a recurring items, and it's not core to our operating performance.

Okay, thanks, Dan, and thanks for taking my questions.

Thank you.

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

Hi, good morning. Want to go back to the energy investors fund question, and you might have answered the question already as much as you can. But I was wondering about the accrued performance fees associated with these assets. Is that part of the deal, i.e., did you acquire these as well, or will you be basically generating performance fees based on new assets and new additions?

Yes, so 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 had been allocated out to the investment teams over the preceding years. That said, similar to the structure of Ares 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 their life cycle, 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 fee is going to -- 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 at a very high FRE margin.

Okay. Could you give us basically maybe a target size for these two new funds that you'd like to raise private equity one? The one for Asia and the energy-focused funds?

Sure. We don't comment specifically on future fund raises, but energy investor funds' fourth fund, 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 with talked about with ACOF-Asia, fund one was $225 million, and our expectation would be that we could see a doubling of that fund upon launch.

Okay, and maybe a final question on business development companies and basically your perspective here, specifically US market. Seems like the net investment income for some of the peers are not enough to pay for the (inaudible) 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 performance in your portfolios?

Sure. I'm 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 does 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 will see that our realized gains continue to exceed our realized losses, generating spillover income in a very meaningful amount, and you will actually see that while spreads have come in quite dramatically over the last 18 months, its come with a commensurate derisking of the portfolio as we focus 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 generated 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 the US. We're very bullish about ARCC's position in it, and I think we've demonstrated the ability to generate very high ROEs in a spread-tightening environment by working on the right-hand side of our balance sheet and harvesting gains, and we'd expect that to continue.

Okay. And in terms of capital deployment, sounds like you're still able to find enough attractive opportunities in the US.

Yes, I'd encourage folks to spend some time with the Earnings Release from ARCC that came out last week, but what you will see, as I mentioned, even with very high selectivity, we leveraged our existing portfolio Company relationships and our origination to have a very, very solid deployment quarter of roughly $700 million of net deployment in ARCC in the third quarter.

Appreciate you taking my questions, thank you.

Great, thank you.

And showing no further questions, I would like to turn the conference back over to Management for any closing remarks.

Great. Well, we appreciate everybody 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 on the prepared remarks, now 2.5 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 as its been. And we look forward to sharing our results with you next quarter. Have a great day.

Thanks.

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