Ares Management Corp (ARES) 2015 Q2 法說會逐字稿

Welcome to Ares Management LP's second-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded on Tuesday August 11, 2015. I will now turn the call over to Carl Drake, Head of Ares Management Public Investor Relations. One moment.

I'm joined today by Michael Arougheti, our President; and Michael McFerran, our Chief Financial Officer. In addition, David Kaplan, our co-head of Private Equity; and Greg Margolies, our Head of Tradable Credit, will also be available during the question-and-answer session.

Before we begin, I want to remind you that comments made during the course of this conference call and webcast contain forward-looking statements and are subject to risks and uncertainties. Our actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings. We assume no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results.

Moreover, please note that the investment performance of, as well as investment in our funds, is discrete from the investment performance of, as well as investment in, Ares Management, L.P. During this conference call we will refer to certain non-GAAP financial measures. We use these as measures of operating performance, not as measures of liquidity. These measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with Generally Accepted Accounting Principles. These measures may not be comparable to similarly titled measures used by other companies.

In addition, please note that our management fees include ARCC Part I fees. Please refer to our Earnings Release and Form 10-Q to be filed later today 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 securities of Ares or any other person, including any interest in any fund. We've also posted a new second-quarter earnings presentation under the investor resources section of our website at www.aresmgmt.com, which can be used as a reference for today's call.

I will now provide a quick recap of our second-quarter results. We generated economic net income of $76 million, which was about in line with the $75.1 million we reported for the same period a year ago. On a per unit basis, our economic net income, net of tax was $0.32 compared to $0.33 a year ago. From a distributable earnings perspective, we generated $0.28 in distributable earnings per common unit, up 56% from the second quarter of last year.

We also declared a second quarter distribution per common unit of $0.26, up from $0.18 a year ago. As many of you recall, on July 23rd we announced our planned merger with Kayne Anderson Capital Advisors and held a conference call the next morning to discuss the transaction. The transaction is not slated to close until early next year and is subject to customary closing conditions. Since this is an Ares Management L.P. earnings call, we will focus our comments and the Q&A session on Ares and its historical results and not on the pending merger.

I will now turn the call over to Michael Arougheti.

Thanks, Carl. Good afternoon, everyone. I'd like to start off by walking you through some observations on the growth prospects and market opportunities for our current business and then, Mike McFerran our CFO, will discuss our financial results for the second quarter in greater detail.

At Ares, we are at the beginning stages of what we believe will be a 12-month fundraising cycle that we expect will benefit our fee-earningAUM, our fee related earnings and longer term, our performance related earnings. If you look across our four existing business lines, we have recently raised, or are in the process of raising flagship successor funds, all with targets larger than their predecessor funds. These funds are also weighted toward our higher returning private equity, alternative credit and direct lending strategies.

We just launched our most significant new fundraise, which is our fifth flexible corporate private equity fund, with a current target of $6.5 billion, compared to our fourth fund, which closed in 2012 at its hard cap of $4.7 billion. We're seeing significant early demand for this fund and we expect a substantial dry first closing as early as the fourth quarter of this year, with one or more expected dry closings following in the next year.

We're also raising our fifth power private equity fund with a target of $2 billion, as compared to the fourth fund of $1.7 billion which was raised by EIF prior to our acquisition. We're targeting a first closing for this fund in the fourth quarter.

Within direct lending, we recently launched our third co-mingled European direct lending fund with a target of EUR2 billion, and we held a first closing of EUR1.4 billion in July, already about 40% ahead of its predecessor fund after only three months of marketing. We are seeing substantially greater demand for the strategy with roughly half the capital from existing investors and half from new investors.

In tradable credit, we held a final close of $175 million in our fourth special situations fund during the second quarter, which took it to over $1.5 billion versus our $1 billion target and compared to our third fund, which was approximately $500 million. We also consider ourselves to be one of the top CLO issuers and in July we priced our third largest CLO in our firm's history, totaling $813 million with a closing expected in September.

And finally, in real estate, our US and European teams are fundraising for successor funds in both our opportunistic and value-added private equity strategies. And last month, we held a first closing on our second US opportunistic fund and are well on our way to our target of $500 million. We're also targeting a first closing on our second European value-add fund during the third quarter, which had a target of EUR600 million.

And as always, in addition to our co-mingled fundraising plans, we'll continue to seek strategic separate account mandates, fundraises for new strategies and potential inflows to our open ended accounts. As we've demonstrated in the past, another aspect of our growth strategy is to add adjacencies to our core strategies, organically and through the addition of teams or platform acquisitions. A good example of our past success is the extension of our direct lending experience and leadership position in the US into Europe in 2007.

Today, eight years later, we've grown organically to approximately $6 billion in AUM in European direct lending, and we have several other interesting initiatives where we're extending our expertise in direct lending. We continue to grow our separately managed accounts in the US and Europe in various strategies which now total $3 billion, and we entered into Commercial Finance this past year and completed a successful fundraise of approximately $500 million this past quarter.

Another great example would be in our structured products area. After acquiring Indicus Advisors in 2011, a structured products and European CLO asset manager with AUM of $2 billion, we've since grown the platform organically to approximately $4.5 billion in AUM today.

Lastly, before I turn the call over to Mike McFerran, I wanted to touch on where we sit in the current market environment and our investment strategy. The US economic recovery remains subdued and ongoing speculation on the timing of rate increases creates additional uncertainty. The global macroeconomic picture is also unclear with slowing growth in China, the overhang of the Greek debt crisis, and declining commodity prices. These concerns have created recent volatility across credit and other risk assets, but have not always materialized broadly in improved risk premiums. Therefore, we remain highly selective with a focus on senior floating rate securities in our credit businesses, in order to protect our portfolios from potentially rising interest rates. This is evidenced by the fact that approximately 81% of debt assets within tradable credit and approximately 92% within direct lending are in floating rate instruments.

In private equity and real estate, we're focused on picking the best companies and assets and staying focused on our downside protection. Given the nature of our AUM, the majority of which is long-lived, locked-up capital, we invest opportunistically, using flexible strategies across different asset classes. As market conditions and default and interest rate risk shift, we believe that our ability to move up and down the capital structure to manage risk and enhance returns is a meaningful advantage.

We take a flexible approach across most of our strategies and our long-dated capital affords us the ability to enter or exit positions when the time is right, which we believe benefits both our fund investors and our unit holders. Our dry powder at over $18.3 billion, or about 21% of our current AUM, gives us the ability to deploy capital during times of market volatility. So, despite the sometimes challenging investment environment, our broad platform has enabled us to find a select number of attractive investment opportunities in the current environment.

Excluding recycled capital in our CLOs and more liquid tradable credit strategies, we invested gross capital across the platform of about $3.6 billion during the second quarter, in line with the $3.4 billion for the same period a year ago. The most significant amounts were $1.3 billion in our alternative credit area, which includes structured credit, special situations, and credit opportunity strategies, about $1 billion by our BDC, and its affiliated vehicles and nearly $500 million in our European and US direct lending funds. We also remained active investors in real estate debt and private equity to a lesser extent.

The dominant investing themes for us continue to be finding opportunities where we can take advantage of the retrenchment of global banks, or acquiring high quality franchise assets where we believe that we can add significant value. Our investment portfolios have continued to perform well as credit fundamentals and earnings growth remained constructive. To that end, let me provide a quick update on performance.

We've continued to deliver strong investment performance for our LPs, particularly when measuring our less liquid strategies over longer periods. In our liquid credit funds, our high yield composite is outperforming with a year-to-date return of 3.1%, compared to the relevant index at 2.5%. And our bank loan composite is up 2.5% year to date, just shy of the loan index with a gain of 2.9%.

While our second-quarter special situations strategy composite returns were negative, primarily due to the weakness in commodity related sectors, we believe that our long-term outperformance remains compelling, with a gross IRR of approximately 18% since inception. Within direct lending, we've continued to generate low double-digit returns for our investors with modest leverage. Our flagship European strategy has continued to track at a 12% gross realized IRR since its inception. And our flagship US direct lending vehicle, Ares Capital, which has delivered a 13% annual total shareholder return since 2004, reported solid net realized gains and therefore is accruing capital gain Part II incentive fees on a year-to-date basis.

Our two most recent corporate private equity funds generated quarterly returns of approximately 3% to 5%, and last 12 month returns of between 19% and 23%. Our US value-add VII real estate fund generated a quarterly return of approximately 3% and approximately 16% over the last 12 months.

And with that, I'd now like to turn the call over to Mike to walk through our results in more detail. Mike?

Thanks, Mike. I'll start with a quick summary of our results and key metrics and then follow up with a review of our balance sheet and our upcoming distribution.

Overall, we are pleased with our second-quarter performance as we continued to grow our AUM at a double-digit pace, and we reached our highest level of distributable earnings since our IPO more than a year ago. In addition, we continued to experience strong fee-related margin improvement versus a year ago, through scale and cost management.

For the second quarter, our AUM increased by about $1 billion to approximately $88 billion, a year-over-year increase of 11%. Our fee paying AUM also increased to $66 billion, up about 11% year-over-year. Our experience has been that new assets will follow good performance. Over the last 12 months we have raised approximately $13.2 billion in gross new capital, including $2.7 billion in the last quarter.

Our second quarter gross inflows were highlighted by direct lending funds, with $1.5 billion roughly split evenly between new separate accounts and add-ons to existing accounts in the US and Europe, and our Commercial Finance fund, and debt capital raised at our business development company, ARCC and its affiliated vehicles. In Tradable Credit, we held a final close of $175 million in our fourth special situations fund, as Mike stated earlier, and we also raised a new structured credit fund totaling $355 million and had other gross inflows to both alternative and long only funds, totaling over $500 million.

For the second quarter we generated management fees and fee-related earnings of $160.5 million and $46.5 million respectively, a growth rate of 12% and 33% over the prior year period. In each case, including ARCC Part I fees.

We achieved year-over-year fee-related earnings increases in three of our four investment groups, reflecting fairly broad-based growth across our businesses. Compared to the first quarter of 2015, the second-quarter's fee related earnings were lower by $1.1 million, reflecting some modest runoff and as the time of fund closings slipped into July.

Looking longer term, we expect continued management fee growth from the fund raising cycle Mike described, as well as from new management fees paid on funds where we are paid as we deploy capital. Of our $10.1 billion in shadow AUM, not yet earning fees, we would expect to earn approximately $98.3 million in annual management fees, assuming we invest this capital over the next few years.

Moving on to our performance related earnings. We generated $29.5 million for the second quarter, compared to $40 million for the same period a year ago. Breaking this down into two components, first, our net performance fees of $22.1 million were up 19% over the prior-year period, driven by market appreciation in funds within the direct lending group and the contribution of ACOF IV. Secondly, our second-quarter net investment income of $7.4 million was down compared to $21.4 million for the prior year period, but relatively in line with first quarter levels. The year-over-year decline is primarily related to softer relative performance in our Asia private equity portfolio compared to a year ago, due to the volatility of the Hong Kong public equity markets. As well as the fact that we have a comparatively less seasoned investment portfolio than we did a year ago.

Our second-quarter pretax economic net income of $76 million was modestly lower quarter over quarter, but it was above the $75.1 million for the second quarter of 2014. On a per unit basis, our economic net income, net of tax, was $0.32 compared to $0.33 for the same period a year ago and $0.35 for the first quarter. Our second quarter distributable earnings of $73 million were up meaningfully from the $48.6 million a year ago and also from the $67.3 million for the first quarter.

Our fee related earnings contributed approximately 64% of our distributable earnings for the second quarter and 67% for the first six months of this year, providing strong underlying cash flow support from our most stable source of earnings.

Moving to distributions. Second-quarter distributable earnings attributable to common unit holders were $0.28 per common unit, net of tax. This morning we announced a distribution of $0.26 per common unit for the second quarter which is up $0.01 from the first quarter distribution and up 44% compared to the second quarter of 2014. The distribution will be payable on September 8 to common unit holders of record as of August 25. Although we believe that our distributions will generally be more stable relative to our alternative manager peer group, due to the high composition of fee related earnings I described, we will of course have quarterly fluctuations from time to time depending on the realization component of our performance related earnings.

At this point in time, we anticipate that our realized performance related earnings could be comparatively softer in the third quarter, but we hope to return to prior historical levels, depending on the realization of ARCC's Part II fees in the fourth quarter and potential private equity exits and their corresponding impact on distributable earnings.

Turning to our balance sheet. At the quarter end we had $192 million of net debt outstanding, with attractive long-term funding in place at the end of the second quarter. In addition, we have a $1.03 billion revolving credit facility with approximately $980 million available for future capital needs.

Our net accrued performance fees decreased slightly to $165 million, but our investment portfolio increased to approximately $610 million. We plan to use one or more forms of longer term debt capital to finance the cash portion of the Kayne Anderson transaction, which ranges from $500 million to $750 million.

Now, I will turn it back to Mike for some closing thoughts.

Thanks, Mike. So in summary, we continue to deliver on our most important goals including quality fund performance, double-digit asset growth, margin improvement, and an attractive distribution. We're very excited about our fundraising prospects for our flagship funds and we expect that this will meaningfully improve our growth and earnings profile in the coming quarters.

With $18.3 billion of dry powder, we believe that we're well positioned to take advantage of any current volatility that we're seeing in certain market segments. And that concludes our prepared remarks.

Again, thanks everyone for your time and support and operator, if you could open up the line for Q&A.

(Operator Instructions)

Our first question is from Mike Carrier at Bank of America-Merrill Lynch.

Hey, thanks, guys. This is Mike Needham in for Mike Carrier. So performance was a little bit lighter in tradable credit in 2Q, which makes sense given the mixed markets in the quarter. As we get closer to a potential move by the Fed, can you give us your view on your performance, assuming maybe a modest rate hike? And I understand the interest rate risk is pretty minimal in the markets that you're in and your comments indicate you're positioned defensively. Just wondering what your view on spreads are and any impact on tradable credit or direct lending? Thanks.

Sure. This is Greg Margolies and I'll speak to the tradable credit end of things. Just to reiterate what Mike and Mike had said earlier, we are heavily weighted toward floating rate assets, specifically because of the Fed potential action that's coming, the question is when, not if. And we, are as you said, defensively positioned for that across all of our portfolios, we are not only again heavily weighted on the floating rate side but even on the fixed rate side, we tend to be under weight duration to the market today. So we'll have a lesser impact on our portfolios as you see the rate increases. Our view is, however, that we're not going to see a spike up in rate but a gradual increase in rates and we are positioned within the portfolios but secondarily also with significant amount of dry powder to take advantage of dislocations in the market, as other people who are more exposed to rate movements if they are forced sellers, we can be opportunistic buyers.

I'd say from the direct lending standpoint very similar story. 90%-plus of the assets that we execute on in both the US and European direct lending business are floating rate and moreover, where we have modest leverage deployed against those assets, we tend to either match fund or liabilities to floating duration to duration. And in the best case, like we've done at ARCC the flagship BDC, we've actually financed the shorter term floating rate assets with longer term fixed rate liabilities. So we structured in a fair amount of asset sensitivity into the bulk of the portfolios.

Then you had one question also just about spreads. I think in all of our markets we've seen spread stabilization in the direct lending business. We've actually seen certain market spread widening which we take to be pretty encouraging sign, and you see that when you look at some of the financial results, in the likes of ARCC where we've actually seen a gradual increase in portfolio yields over the last couple quarters.

Okay. Thanks. And just as a follow-up, I'm wondering just have you got any more clarity on your relationship with GE and the direct lending unit? And then ultimately if you wind up closing the JV, how does that impact your growth prospects for the business and then maybe longer term, do you ultimately see more opportunity there? Thanks.

Sure. I'll take the second part first and we covered a lot of this on the ARCC earnings call. But I'll just say, from my standpoint while we enjoyed a very long and profitable partnership with GE, I think GE exiting many of its businesses including the cash flow direct lending business in the US and Europe is a net positive for ARCC and our global direct lending franchise. I think that's rooted in two issues.

One is just the nature of GE's business in terms of their cost of capital and their competitive positioning relative to the new buyers of the business. But two, and I think most importantly, as we developed our partnership with GE, particularly in the US, there were certain parts of the market that we forewent in order to grow the partnership with GE. Most specifically, is the underwriting and distribution of more traditional and lower yielding first lien bank loan assets. And as we discussed on the ARCC call, even in the last six weeks since the GE announcement, we have seen a noticeable and meaningful increase in the amount of senior debt underwriting and distribution that we have been able to take, which I think bodes well for future ROI and value creation within the BDC.

Second, vis-a-vis the JV and this also came up on our earnings call last week, there's only so much we can say because we are still discussing the ultimate resolution of the SSLP with GE. I think the simple way to think about this is we've formed a new joint venture with AIG and Varagon that is structured very similarly to the SSLP that we had with GE. So the opportunity for us to continue to execute on unitranche loans at scale with very attractive economics to the BDC, we believe are preserved. And while we are still working through the mechanics of the resolution of the existing portfolio, and there's a number of ways which it can go, any wind-down of that book if that's ultimately what happens would effectively give way to a winding up or growth in our new joint venture. We actually think it's a net positive, although we don't really have the specifics yet as to what the final resolution of the $10 billion or so of assets still on GE's balance sheet are going to be.

Okay. Thanks.

Next question is from Craig Siegenthaler at Credit Suisse.

Thanks. Good morning.

Good morning.

Just starting with the $10.1 billion of shadow AUM, can you provide some perspective around really the duration of this balance and the timing? I know a lot of it depends on the investment opportunities, but just a little more color here would be helpful.

Sure. Two points. It's going to be a function of when we deploy and the timing of those opportunities. I think generally our expectation is we think that will be deployed ratably over the next 18 to 24 months.

We've given a breakdown in some of our prepared materials that you can access that looks at the breakdown. And obviously given that the bulk of the shadow AUM is coming in our credit funds that pay us on deployment rather than commitment, that's where we should be focusing. So it's going to be our direct lending strategies in the US and Europe and some of our tradable credit strategies.

As we talked about on our ARCC call and as Greg highlighted, we're actually finding some pretty good opportunities to deploy given the recent market volatility. That's a combination of our competitive positioning and our liquidity relative to some of our peers. It's frankly also the fact that some of our peers who are less liquid, we've seen them retrenching in certain of our core markets. So I think we have all the competitive advantages that we've discussed on past calls in terms of origination, balance sheet scale, flexible product offering to attack these markets when a lot of our peers are less liquid. So we've always said 18 to 24 months, but my view is if we continue to see the kind of market volatility we've been experiencing, that could accelerate.

Got it. And then just as my follow-up on tradable credit, it looks like there's close to $6 billion of incentive eligible AUM that's below the pref rate or the high water mark. Looks like maybe $1 billion to $2 billion could be pretty close. Could you provide some color and sort of the distance the high water mark or the pref rate that $5 billion to $6 billion is of tradable credit that isn't actually generating incentive right now?

Not going to go fund by fund but to your point, there's a fair amount of it where we'd say it's hovering close to the pref rate for the respective funds.

A lot of that was in our special situation strategies that given the volatility, particularly towards the end of the quarter actually crossed over towards the end of the quarter. So they're hovering at or around the pref rate. So I think the ability to cross back over should be fairly straightforward.

Thanks for taking my questions.

Thank you.

The next question is from Chris Harris at Wells Fargo.

Thanks. Hey, guys. So just a follow-up on the fundraising outlook. Mike, of the fundraisings you talked about, I think I totaled them up to $12 billion or more. What amount is in shadow AUM as of today, that $10 billion in shadow AUM you guys talked about? Is there incremental beyond that, that's going to be adding to shadow AUM? Just trying to reconcile some of these numbers.

Just to reiterate, the funds we talked about were our fifth flexible corporate private equity fund which we recently launched at $6.5 billion versus a $4.7 billion predecessor fund. We have yet to have a closing on that, but we expect a dry first close in the fourth quarter of this year. Our fifth power private equity fund again, which is a $2 billion target versus a $1.7 billion predecessor fund, we have yet to have a close on that. We expect to have a first close on that in the fourth quarter.

Our third flagship European direct lending fund at EUR2 billion, we've had a first close subsequent to the second quarter at EUR1.4 billion. So that is not in the numbers for June 30. And then our two opportunistic and value-add real estate funds in and around $500 million and EUR600 million, again not in the June 30 number. Of the $12 billion to $13 billion you referenced, the only closing that's actually in the shadow is the $175 million final close we had on our fourth special sits fund at $1.5 billion.

We deployed some of that, as well.

Okay. Great. Sorry, go ahead.

I was just going to say, as we look forward to the end of the year and our jumping off point of 2016, obviously that shadow AUM is going to be a function of deployment and capital raising. But the meaningful pipeline is not currently making its way into the financials or the AUM numbers.

Got it. Understood. And the comment you made about the outlook for performance fee earnings being potentially lower in Q3, maybe I misheard that. I think that's what I heard. Can you expand on that a little bit? What is it that maybe is making you a little bit cautious on that outlook for next quarter?

Sure. Just to clarify, we commented on realizations, so the component of actual cash that's monetized from our performance fees and that's really just based on the timing of, we talked about two parts. One is, we do receive some annual incentive fees in cash, most notably the ARCC part 2 fees which happen at year end. And second, where we are today and looking at our realization pipeline, we do think that realizations are going to be softer this quarter, again, based on where we are midway through it, but like the outlook for Q4.

Okay. And then one real quick final question here. I know we're not talking about Kayne on this call, but I did want to get one clarifying point. And that was, I think in the past you guys had talked about some commitments you had made to your balance sheet and potentially growing your balance sheet. Does the Kayne deal put some of those investment opportunities on the side, or are those going to be done in conjunction with the acquisition?

Yes, it does not put them on the side at all. I think as folks know, we're a triple B plus rated Company, both Fitch and S&P, as Mike mentioned in our prepared remarks. We have a significant amount of balance sheet liquidity in the form of our largely unfunded revolver in excess of $1 billion. We do run a balance sheet-light model as people know, but in order to continue to support the development of new strategies, but also the ongoing fundraising and aligning ourselves with our LPs, we do invest in our own funds. And at the end of June, I think as people know we had $600 million in over 50 different funds invested that sit on the balance sheet. That part of our business will continue ordinary course across each of our four and soon to be five complementary business lines. But the Kayne transaction is not expected to borrow liquidity or capacity away from our core business.

Got it. Thank you.

Next question is from Michael Cyprus at Morgan Stanley.

Hey, good afternoon. Question on the shadow AUM. I heard you talk about this before as well on the call, fairly stable the past couple of quarters. Could you help us understand some of the puts and takes there and could we reasonably expect this to decline as you're putting capital to work, or does it stay flat given a lot of the fundraising that you described earlier?

I think it depends on when you look at it and as you highlight, that is not a static pool, so it's a combination of capital raised, capital deployed, and then obviously runoff. I believe with the $3.7 billion that we raised last quarter, that also was offset by, we had about $2.2 million of an offset which is why it was somewhat flat. But my sense is given the fundraising pipeline that we have today that, that number should be flat to growing, even if we have a significant amount of deployment towards the back half of the year.

Got it. So the shadow AUM still flat to up slightly because of all the fundraising that's happening, even as you're deploying.

Yes.

Okay. And then I think you mentioned around $3 billion or so that was deployed in the quarter. How should we think about that into the second half of the year? Is that a good run rate? And if the environment deteriorates from here should we expect that to trend higher?

I'll let some -- if Greg wants to comment and David, but generally speaking there's a balance. When we see market volatility provided that it's not massive dislocation, we do see opportunities to increase deployment as spreads widen, risk adjusted returns get more attractive and some of our competitors retrench. If you look at the trajectory in the first quarter versus the second quarter and even versus our deployment last year, it's been surprisingly consistent in that $3 billion to $4 billion range per quarter. Based on where we are in the quarter, it feels like we're still trending to that level. But if we do see a significant pickup in volatility, I would say generally speaking across our businesses you probably see a ramp-up in deployment as opposed to a retrenchment. I don't know if Greg or David, you have anything to add on tradable credit or GE.

Generally agree. We have to really break things down from a technical displacement versus a fundamental one. From a technical perspective if we're seeing fund flows either from retail or from CLO raises, or kind of the pick through the python, that can change our deployment and that has over the course of time as we take advantage of that, but those are more short-term in nature. When we see more fundamental breaks in the marketplace, i.e. around credit issues within sectors or within specific companies that can change a long-term investing ability and would increase our deployment if we see larger breaks from a credit perspective.

Okay. Great. Thanks very much.

Next question is from Ken Worthington at JPMorgan.

Hi. This is Amanda Yao, stepping in for Ken Worthington. My question is on tradable credit. You mentioned the funds falling below high water mark this quarter. How close are they to the hurdle and as third quarter is evolving so far? Do you see a potential reversal sometime relatively soon?

I'll start. It's Greg. I'll start on a more general note and then Mike, if you want to dive in on specifics. I think a couple things are important to note that not all hurdles are created equally. What I mean by that is a number of the funds are long-term private equity style funds in nature and have a much longer term perspective in terms of investing. The dislocations we're seeing in some of the marketplaces we're taking advantage of those as the markets in some sectors weaken, to build positions for a longer term.

The franchise companies we're buying we believe in, in terms of the risk adjusted returns that we'll get over the longer term. So our view on that is certainly not a quarter by quarter view on hurdle rates, but a longer term view for those specific funds. So again, when we look at those hurdle rates it's hard to generalize across the whole platform. Mike, I don't know if there's specifics you want to --

I think we said in response to the earlier question, there were a number of funds that actually crossed over in the quarter, just given some of the volatility in the tradable credit markets and are fairly close to recapturing the hurdle.

Thank you.

Next question is from Doug Mewhirter at SunTrust.

Hi. Good afternoon, or good morning in Los Angeles. First of all, maybe a smaller question. I noticed you do have a higher European exposure. Was there any sort of translation issues in your revenues, the fees translating from euros to dollars in the quarter which may have been a headwind?

No. We hedge out management fees with respect to the net amount after any expenses we have with foreign currencies. There's de minimis impact on our performance from FX.

I believe we had a $2 million foreign currency transaction loss the second quarter, so not a meaningful number.

Thanks for that. My second question I guess as it relates to margins, looked like your -- I'll call it the fee related margins, your fee related earnings divided by your management fees, it ticked down sequentially, about flat sequentially. I know you've actually been on a pretty encouraging up trend because of better scale and such. I guess is there any reason for that pause? I know you mentioned some of the closings slipped to the next quarter so maybe you staffed up without getting those -- the revenue. Just any better details about that would be helpful.

Yes, the way I think about it is when you look year over year, last quarter's stepping up to a 29% margin wasn't a one off. You've seen us maintain at that level. I think as we talked about in our prepared remarks, as we add incremental revenue to the business through management fee growth through a lot of the funds that Mike's talked about, the run rate cost of those funds is already baked into our existing business. So as we grow we expect to see that margin expansion and the benefits from it.

We did see a slight uptick you'll notice if you dig into the financials in the SG&A line, as we expanded our office footprint to accommodate some of that growth and added some new headcount. So there is a little bit of the effect that you're highlighting which is just the spend coming out ahead of the fund deployment. But again, not a huge number.

Great. Thanks. That's all my questions.

At this time I show no further questions. I would like to turn the conference back to Mr. Arougheti for final remarks.

Great. Well, we appreciate everybody spending so much time with us today. Always good to catch people up and we look forward to speaking again next quarter. Thank you.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available through September 9, 2015, by dialing 877-344-7529 and international callers by dialing 1-412-317-0088. For all replays, please reference conference number 10068954. An archived replay will also be available on a webcast link, located on the home page of the investor resources section of our website. Thank you for attending. You may now disconnect.