Ares Management Corp (ARES) 2016 Q1 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded on Tuesday, May 10, 2015. I will now turn the call over to Carl Drake, Head of Ares Management Public Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today for our first-quarter conference call. I'm joined today by Michael Arougheti, our President, and Michael McFerran, our Chief Financial Officer. In addition, Greg Margolies and Kipp deVeer, the Co-Heads of our Credit Group, will also be available for questions.

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

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 like-titled measures used by other companies.

In addition, please note that our management fees include ARCC Part 1 fees. Please refer to our earnings release and form 10-Q that we filed this morning for definitions and reconciliations of these measures to the most directly comparable GAAP measures.

Our first-quarter earnings presentation has also been filed with the SEC and is available under the investor resources section of our website at www.aresmgt.com, and can be used as a reference for today's call. 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 securities of Ares, or any other person including any interest in any fund.

Before I turn the call over to Michael Arougheti, I will provide a quick recap of our first-quarter earnings. We reported economic net income after-tax per unit of $0.08 compared to $0.35 for the same period a year ago. Our distributable earnings per common unit were $0.15 per common unit. We declared a distribution of $0.15 per common unitholders of record on May 24 and payable on June 7. I will now turn the call over to Michael Arougheti.

Great. Thanks Carl. Good afternoon, everybody. Since our last earnings call at the end of February, liquid credit and equity markets continued to recover following what was a volatile start the year. This was driven by signs of less restrictive Federal Reserve policy, a continued recovery in commodity pricing, and a more stable global growth outlook.

I remind you that volatile markets often create excellent investment opportunities and play into areas of strength as a long-term opportunistic investor with locked up capital. As a firm we've made some of our best investments during distressed and dislocated markets.

Our patient and flexible approach has allowed us to establish or add to positions during these periods, enhance value over time, and then realize better outcomes once markets stabilize. However, the flip side is that volatile markets can impact market prices and constrain realization activities in the short term.

We weren't immune to these market forces during the first quarter. Our economic net income was reduced due to some mark-to-market unrealized depreciation on certain positions, and our distributable earnings reflect slower realization activity.

As a result our fee-related earnings, which were not reduced by market volatility, comprise an even greater portion of our distributable earnings for the first quarter as compared to prior periods. Importantly, fundamental portfolio Company and asset performance remain very strong.

We continue to be pleased with the core drivers of our business across fundraising, investing, realizations and fund performance, and let me walk you through these in order. So on the fundraising front, we're coming off of our most successful stretch ever, with approximately $23 billion in gross capital raised in the last 12 months. Our most significant fund raised was our oversubscribed fifth flexible capital private equity fund, Ares Corporate Opportunities Fund V, or ACOF V, which reached its hard cap of $7.85 billion.

Over the past 13 years each successive ACOF private equity fund has been larger than its preceding fund, and this growth has been driven by strong historical returns and our loyal and growing investor base. For example, ACOF IV is a $4.7 billion fund. And we were able to raise $7.85 billion against our target of $6.5 billion in a relatively short period of time, primarily through existing investors who contributed over 80% of third-party commitments.

ACOF will continue our flexible capital approach, pursuing opportunistic investments in businesses with strong franchises and best-in-class management teams where the fund's capital can unlock growth. So during the first quarter, $2.1 billion of our $3 billion in total fundraising was attributable to ACOF V. The remainder consisted of additional capital raised in European real estate private equity, European direct lending, and global asset backed comingled funds, as well as inflows and capital raises into our liquid vehicles.

Across the firm we continue to have a loyal and committed investor base, as existing investors are consistently accessing multiple products across our platform. During the last 12 months more than 80% of our direct institutional capital was raised from existing investors.

Investors who remain frustrated by returns, as well as volatility in more traditional fixed income and global equities, are increasingly attracted to our broad alternative product offering. As a result we are experiencing solid demand from pension funds, private banks, sovereign wealth funds, insurance companies, and investment managers located primarily in North America, Europe, Asia and the Middle East.

Going forward we will focus on closing out our existing queue of successor funds which includes our third European Direct Lending Fund, our fifth Power and Energy Infrastructure Fund, and our US and European Real Estate Funds. We're continuing to enjoy significant demand for new strategic separately managed accounts, particularly in our recently combined credit group, as investors seek our expertise on finding value across liquid and illiquid credit strategies. In addition, we are in the preliminary stages of developing several first-generation funds in adjacent strategies.

Our fundraising success has translated into a significant amount of available capital to invest. As Mike McFerran will discuss shortly, we had $23 billion of dry powder, of which a record $16.5 billion is eligible but not yet earning management fees, also known as our, quote unquote, Shadow AUM. Our management fees and fee-related earnings won't reflect this Shadow AUM until we invest the capital or begin the investment periods for these funds. Overall we expect the deployment of our Shadow AUM to contribute materially to our future earnings, particularly for our full-year 2017 FRE and beyond.

To now turning to our investing activities. We continued to leverage the collaborative power of our platform to find interesting opportunities during the first quarter, but aggregate deployment levels were lower compared to prior-year levels, as deal flow in our markets generally slowed. In certain segments where asset pricing remains elevated, we continue to focus on high quality franchise assets where we at Ares have an edge and that can be purchased at attractive risk rewards while protecting downside risk.

During the first quarter we deployed $2.1 billion in gross capital with approximately $1.1 billion from our draw-down funds compared to $4.8 billion in gross capital and $2.1 billion from draw-down funds for the same period last year. Of our $1.1 billion in draw-down funds, we were most active investing in European and US direct lending, focusing on senior and unit tranche floating-rate loans to middle-market companies.

As a market leader in both the US and Europe we continue to benefit from secular bank retrenchment and the long-term shift toward non-bank alternative lenders. As direct lending to middle-market companies and power projects, real estate property owners -- continue to shrink on bank balance sheets. And we plan to continue filling this void in the marketplace.

We also made investments in our opportunistic European real estate private equity strategy where we invested in Western Europe with leading owners and developers of retail centers to benefit from changing consumer spending habits and emerging city center locations close to major transport nodes.

From a realization and distribution standpoint, meaningful realizations during the first quarter were constrained by the volatility we witnessed in the capital markets. However, greater market stability in the second quarter to date has brought improved realization opportunities for us. And at this point in time we expect an increase in our asset realizations for the second quarter, which should positively impact our distributable earnings, as Michael McFerran will discuss shortly.

Despite volatile conditions, our fund performance for the first quarter generally remains wrong. For example, our second comingled European Direct Lending Fund generated a quarterly change in value of 3.4%. And our BDC, Ares Capital Corporation, snapped back during the first quarter with a 2.5% total NAV return.

In addition, our Loan and High Yield Funds generated composite gross returns of 2.1% and 3.2%, exceeding or meeting their respective indices during the first quarter which were up 1.3% and 3.2% respectively. Furthermore, our US flexible capital private equity funds in the aggregate continue to outperform the market indices with a 2.8% net asset value increase for the period as compared to the broad S&P 500 index which generated a total return of 1.4%. And while there is of course no assurance as to the ultimate realizations on our unrealized investments, all four of our flexible private equity funds continue to have strong performance with an aggregate gross and net IRR since inception of 23% and 16%.

For the first quarter, our US real estate private equity strategy continued to enjoy strong property-level cash flow growth, which is reflected in the quarterly NAV appreciation of 2.9% in our US Real Estate Fund VII. However, we did experience some unrealized mark-to-market depreciation in a diversified special situations credit fund and our Asian Growth Capital Private Equity Fund due to market volatility in certain publicly traded positions during the first quarter. Importantly, both of these funds continue to have positive gross returns since inception.

And so in summary, our funds continue to perform strongly and our clients continue to allocate more capital to us as a validation of this strong performance. We believe that we remain well positioned for profitable growth. Over the past 12 months we've raised a record amount of gross capital, and we expect that we can invest this capital over time and drive meaningful future value for both our investors and our shareholders.

Our investment teams are working hard to unlock value in a market with very low interest rates and generally elevated asset pricing. And now I'd like to turn the call over to Mike McFerran, our CFO, to give you his perspectives on our financial results. Mike?

Thanks Mike, and good afternoon everyone. As Mike stated, like others in our industry, market volatility had an impact on our first-quarter performance-related earnings with unrealized marks on our assets. But we view these market price fluctuations as a reference to evaluate a point in time, and not necessarily a reflection of fundamental performance. We are much more focused on using volatility as an opportunity for long-term value creation. We believe these fluctuations are often caused by investors with short-term time horizons, and provide investors like Ares with the ability to take advantage of purchasing franchise assets at better values.

Looking forward, we are sitting with a sizable backlog of Shadow AUM that we expect will generate a meaningfully higher level of run rate management fees than our first quarter's level. That said, a more significant portion of the earnings benefits from the deployment of our Shadow AUM will likely be realized more fully in 2017 and 2018.

Let me explain how the deployment of our Shadow AUM and the impact from our business expansion could be reflected in our fee-related earnings trajectory. We continue to invest in new products, business development professionals, distribution, and infrastructure that we expect will help us increase future value for our unitholders. However, these investments carry expenses that are borne largely upfront, with future revenue and earnings payoffs coming in the future periods.

For this reason, we may experience flattish fee-related earnings over the near term until such time as we deploy our Shadow AUM, including beginning the investment period for ACOF V. As a reminder, we will not beginning earnings fees on the $7.6 billion in committed third-party capital in ACOF V until it begins its investment period upon its first investment, at which point there will be a step down in the fee rate for ACOF IV. We remain highly selective and opportunistic in our deployment, given inflated asset pricing currently in the market.

Now with those comments, let me turn to our first-quarter 2016 financial results. Over to the last 12 months our AUM increased by about $6.6 billion to approximately $93.5 billion, a year-over-year net increase of approximately 8%, while our total current fee-related AUM only increased about $900 million for a modest increase of more than 1%, given ACOF V is not yet earning fees.

Moving onto our available capital. Of our total $23 billion in available capital at the end of the first quarter, we reached a record $16.5 billion in AUM not yet earning fees, or Shadow AUM, an increase of over 63% from the prior period's level of $10.1 billion. Of that $16.5 billion, we consider about $14.2 billion eventually available for deployment, which includes $7.6 billion from ACOF V, $2.9 billion from direct lending separately managed accounts, $1.7 billion from our third comingled European Direct Lending fund, and $1 billion from our fourth Special Situations Fund.

Our Shadow AUM carries an expected management fee rate of approximately 1.2%, slightly higher than our current blended management fee rate, as the backlog is weighted toward our higher average returning and higher fee generating strategies. We expect to generate significant management and performance fees over the longer term, once we begin to invest -- begin the investment periods or deploy the capital for these funds.

Our incentive-eligible AUM increased 27% from the first quarter of 2015 to a record $47.9 billion. Of this amount, $10.6 billion is incentive-generating AUM and $37.3 billion is not. Of the $37.3 billion, most of this is represented by funds either earlier in their respective lifecycles or reasonably close to their hurdle rates, including approximately $15 billion that was within 1% of their hurdle rate.

For the first quarter we generated management fees of $162.7 million compared to $162.3 million for the same period a year ago. In each case including ARCC Part 1 fees. Year-over-year growth is subdued, as a significant portion of recent capital raised is not yet earning fees, driving strong growth of 63% in our Shadow AUM from the first quarter of 2015.

For the first quarter, our fee-related earnings were generally flat with fourth-quarter levels and lower compared to the same period in 2015. Our first-quarter FRE margin was lower versus 2015 due to higher G&A expenses as we continue to scale our professionals and infrastructure. For example, we had a net increase of 55 total professionals across the firm compared to the same period a year ago to augment and support anticipated future growth.

As Mike stated earlier, our fund performance was generally quite good during the first quarter, although we did experience some unrealized depreciation in certain funds within credit and private equity, particularly in our Asian growth strategy. Since our balance sheet includes a strong weighting towards our Asian private equity portfolio, our investment income was adversely impacted by the volatility in our publicly traded holdings on the Hong Kong exchange. I do want to highlight our Asian private equity portfolio is marked above cost as of March 31 and it has had a modest rebound in valuation since quarter end.

Our first-quarter distributable earnings were $41.3 million compared to 67.3 million a year ago. As Mike stated, our realizations were below average due to volatile market conditions in the first quarter. However, the second quarter is tracking well, as we have visibility on realization activities across the platform that we expect will bring our second-quarter distributable earnings within normalized historical levels.

Going forward, our expectation is that our distributable earnings will have a higher base foundation due to the expected step-up in our fee-related earnings and FRE margins as we benefit from deployment of our Shadow AUM, particularly with respect to ACOF V. For example, the impact of activating management fees for ACOF V net of the step down of ACOF IV would've resulted in an additional $0.06 of distributable earnings per common unit for the first quarter of 2016.

Please note that the investment environment will dictate when we activate ACOF V. Our pace of capital deployment is largely consistent with our historical average at this time, but market conditions could of course either accelerate or decelerate investment pace, which would impact timing. Of course we expect distributions will continue to be lumpy. But we expect the fluctuations to start from this higher base foundation of distributable earnings once we begin the investment period for ACOF V and to earn management fees on this capital.

Moving onto distributions. This morning we announced a distribution of $0.15 per common unit for the first quarter. This distribution will be payable on June 7 to common unit-holders of record as of May 24.

Before I turn the call back over to Mike, I wanted to address our recent S3 filings since we have received a number of questions. Last week we filed a registration statement for up to 152.8 million common units. Similar to some of our peers, this relates to the issuance of our public common units upon exchange by our employees of private units they received prior to the IPO. These units are subject to a lock-up that initially released on the second anniversary of our IPO, and permits sales of up to a maximum of 20% of the units annually. So only the first 20% is eligible for sale in 2016.

As a matter of convenience, we registered 100% of the units that are issuable upon exchange by our employees from time to time. The filing of this registration statement does not necessarily mean that any holder is selling and there are certain restrictions of the frequency of sales governed by holders exchange agreements.

In addition, this week we filed an S3 registration statement to put ourselves in a position to opportunistically conduct one or more primary preferred or common equity offerings in the future. Any potential offering would be subject to a number of factors, including market conditions, and of course our own views on the short- and long-term benefits to the Company and our own unitholders from any such issuance.

Before I turn the call over to Mike, I want to spend just a minute on some closing thoughts. As we have described, between our fundraising momentum, our Shadow AUM not yet earning fees, and our incentive-eligible AUM we believe we are well positioned for fee-related earnings and distributable earnings growth as we head into 2017. Accordingly, our fee-related earnings growth should translate into future margin expansion. With that, I'm going to hand this back to Mike for some closing comments.

Great. Thanks, Mike. I know we just covered a lot on the course of the call describing our recent accomplishments and where we are today. So maybe just to sum it up. We feel very good about how we're positioned and the opportunities that lie in front of us.

Capital raising has been very strong, most notably with the recently announced $7.85 billion final close on ACOF V. We are continuing to expand our LP base and working on new funds and separate account opportunities with existing and prospective investors.

Our deal sourcing and diligence capabilities continue to translate into strong fund performance and deployment. We have record dry powder and Shadow AUM. We believe that we remain well positioned to review M&A opportunities, which we believe will increase as we enter the next economic cycle. And I think most importantly, we are leveraging the power of the entire Ares platform across all of our activities, and our investment in operational teams in order to execute on our long-term business objectives and strategic vision.

And with that, we will thank everybody for their time and thank our investors for their continued support. Operator we'll open up the lines for questions.

(Operator Instructions)

Mike Carrier, Bank of America Merrill Lynch.

Good morning. This is Mike Needham in for Mike Carrier. Looking at the gap between incentive-eligibile AUM and incentive-generating AUM. Can you give us an idea of the timing and the drivers to close that gap, and whether it's assets getting deployed?

And think I think you mentioned $15 billion of assets were sitting around 1% of their hurdles. Does that include both ARCC and then the other $10 billion of assets ex-ARCC?

Yes. I think starting with the second part of it. The $15 billion we mentioned that was within 1% of the hurdle rates does include the ARCC, which was $8.8 billion of that number. With respect to the difference between, I think you were asking, how much of the -- what's the timing to move from incentive-eligible not yet earning fees to incentive-generating.

If you take a look at it, we have $47.9 billion eligible. Of that, $10.6 billion's earning fees. The difference of $37.3 billion we'll put into a few buckets. The first is the $8.8 billion of ARCC that we talked about. Another 50% of that number represents capital that's actually not invested yet, that as we talked about will be put to work over the next couple of years.

The rest of about, let's say another 25% of that total of $37 billion, represents amounts that are below the hurdle, of which the majority of those represent amounts that we think are reasonably close to their hurdle with only a small amount, or frankly less than 2% of our total incentive-eligible AUM that we think is at a pretty good distance from its hurdle.

I think, Mike, if you go to the earnings release and the attached presentation, you will see a breakout of that on page 7.

Yes. Okay, got it. Thanks. And then just a question on fundraising. You noted that existing clients drove your strong fundraising over the last year. And wondering if you just drilled down into what types of clients are driving the flows, then, to other areas. One separate accounts where the demand is coming from in terms of client-type strategy?

And then the second, I didn't see a CLO called out on the commitments page. And just wondering what the outlook for CLOs is. I think you did like five last year.

Sure I'll answer the first part and then I'll let Greg comment generally on the state of the CLO market. But as we said in our prepared remarks, and we've been pretty consistent over the last couple of years, the global demand for alternatives is growing. We are seeing it from all corners of the globe and all corners of the investing community, largely because people are frustrated with the returns that they're getting in their fixed income portfolios today, given the yield environment that we are in. Or they are frustrated with the volatility and returns that they're getting in the global equity markets.

And so one way to think about this from the institutional investor's perspective is if you are a pension fund or an insurance company with an actuarial payout requirement of somewhere between 6% to 8%, based on traditional portfolio allocation methodology and models, you're probably struggling to meet that bogey. And that's where alternatives are becoming an increasingly important part of the allocation solution.

Similarly if you are a high net worth or traditional retail investor who is planning for retirement and watching a shift from defined benefit to defined contribution, you too are starting to think about how you get yield. And not surprisingly, you're focused on a 6% to 8% type of return as well.

So what's interesting, when you look at where the allocation is coming from, we're seeing an increase in the number of institutional investors across every investor type, we are seeing an increase in retail, both traditional and high net worth for the types of products that we manage. And to your last question, what we are also seeing is a consolidation of assets in the hands of fewer scaled managers. And that's what's driving this cross-platform investment trend.

And so when you talk to the large institutional investors, they're trying to drive efficiencies in their business, they're trying to reduce friction costs in how they're allocating between different alternative asset classes. And so to get onto a platform like ours where you can invest with an infrastructure and an investment philosophy that you trust, not surprisingly you'll see private equity fund investors transition to be credit platform investors. And that's really been the trend.

So when we talk about 80% of our existing investors driving our last 12 month fundraising, that's in sequential re-ups on existing strategies. But I think as importantly a move towards multiple products across the platform.

And for the largest of those investors, the SMA is becoming a much more prominent part of the conversation where folks are trying to get much more dynamic access to what we do, where they can, for example give us a large managed account that allows us to invest in both liquid and illiquid credit in direct lending, structured credit, tradable credit, et cetera that gives them just a much more dynamic portfolio allocation. With that, Greg, just a comment maybe on the lack of CLO fundraising, what's going on there?

Sure. Thanks, Mike. We certainly expect there to be continued CLO fundraising from our platform over the course of the balance of this year. What we are focused on now is finding the right arbitrage situation, i.e., the right pricing of liabilities, at which point we will certainly be looking to raise those.

We have both debt and equity investors lined up. We are really just looking to get the right returns for our investors right now. The markets are beginning to open up on that side. So we'd expect to see that opportunity increase over the course of the balance of the year.

I think what's most interesting is that the risk retention rule changes in both Europe and the US. [We're] certainly working in our favor in that it will decrease the number of CLO managers out there. And we're beginning to see -- well, we start seeing in the end of next year and it's accelerated this year in terms of the number of CLO managers that are up for sale.

And like anything else, we're certainly looking at those opportunities and we'll figure that out over time. But I think you'll continue to see that consolidation that plays in our favor over the course of this year and next year, both in terms of new fundraising and consolidation in the space.

Okay, great. Thanks for taking my questions.

Thank you.

Ken Worthington, JPMorgan.

Good afternoon. First on ACOF IV. If I'm right, it appears to have fallen out of carry. What investments in that fund are weighing on returns there, if in fact I'm right and it did fall out of carry? And then how much would the remaining investments have to appreciate to get the fund back into carry?

Sure. The actual return on ACOF IV was effectively flat quarter over quarter. I want to say it's down about 1%. So it's not really a matter of investments weighing on it. It's when we entered the quarter if you look at the way IRR works, we're close to the hurdle rate just from passage of time and the fund still in its investment period, earning fees uncommitted.

So even if marks are just completely flat quarter to quarter, what you would see from an IRR calculation standpoint is the IRR come down. And that's what brought it below the hurdle rate. I think it's disclosed in the 10-Q and the MD&A, but you will see where we were on an IRR for the quarter was just under 8%. The hurdle's at -- the hurdle is 8%. So it's just right at the threshold below it. With that, we want to highlight is, as we sit here today, our best belief is we would be back above that hurdle rate if we were to mark that portfolio as of this moment.

And as I mentioned in our remarks, the realization activity has begun to pick up after was a pretty slow first quarter. So I think that will cross over pretty quickly.

Okay, great. Makes sense. And then as we think forward to ACOF V, you mentioned that you will turn on the fees once the first investment is made. If I look back at ACOF IV, it looks like two-thirds of the portfolio is invested right now.

Given that level of investment, is ACOF V more likely to be turned on in 2016 if market conditions are normal? Or is it sort of a no-brainer that it would be 2017? I guess you guys have a better sense of pipeline and stuff that we do. I couldn't figure it out on my own. Thanks.

As Mike said in his prepared remarks, it's really going to be a function of the market environment that we are in. Our best guess today as we look at the market environment we are in is it would be towards the back half of 2016 in all likelihood. Hard to see it slipping to 2017. But again, it's going to be market dependent.

Okay, great. Thank you very much.

Craig Siegenthaler, Credit Suisse.

Thanks. So just first on the improving realization commentary for 2Q. Are there any specific funds that drove this increase, or is it pretty broad-based given how bad January and February were for exits and monetizations versus what we're seeing here in April and May?

We are seeing it more broadly. Specifically we are seeing it in private equity and in our credit strategy, especially as we have some older CLOs that are getting towards the end of their life that has some built-up fees that we realized once those CLOs are called. I think across the board we are seeing an increase realization outlook for the second quarter, but also to highlight for third quarter as well.

Got it. And then if you look at slide 4, and maybe you covered this a little bit earlier but I wanted a little more detail on it. What funds do you expect to be the bigger contributors on the fundraising front over the next 12 months, given that ACOF V just had its final close?

So as we've talked about, we have a queue of what I would call successor funds that are still in the market and finishing out fundraising. A3, which is our third comingled European Direct Lending fund has raised $2.1 billion to date. That should be closing out here in the near future.

With regard to our private equity business, our fifth Energy and Infrastructure fund is in the market and an area of focus for investors. And then my expectation is, just based on timing, that we would start to see the new generation of European and US real estate funds come to market as well.

What's not necessarily shown on slide 4 but is really going to be a big driver through the rest of 2016 and 2017 is the separately managed accounts that we referenced earlier. That continues to be a big area of focus for us, and the amount of inbound inquiry that's coming across the platform has been pretty significant.

And Michael, on that, what about ACR II, or Real Estate Debt II? And then what about ARDC II, the Credit Opportunities II funds?

So right now ARDC, obviously a publicly traded closed-end credit fund, the new issue market for closed-end credit funds is effectively closed. And you can look at where ARDC trades despite some very good fundamental performance and dividend stability. Whatever demand was finding its way into that strategy in the public market, right now is translating into some of this demand for diversified credit exposure through some of the managed account conversations that I referenced.

In terms of ACR, again ACR I think as people know, is our publicly traded mortgage REIT. We continue to grow the commercial real estate lending business largely through managed accounts, given where the mortgage REIT is trading as well.

Got it. Thank you.

Michael Cyprys, Morgan Stanley.

Good afternoon. This is Nick Stelzner filling in for Mike Cyprys. Just a question on SSLP. How much more of a reduction in leverage and pay-down of loans in SSLP should we expect from here? It was a bit of a headwind in 1Q to asset growth. So just what are the opportunities, I guess, for that to some positive going forward?

I'd also refer you to some of the comments that Kipp made. And he's here, he can chime in on the ARCC call. But if you look at the reduction in AUM, if you will, over the last 12 months from the unwind of our global partnerships with GE, it was roughly $7 billion. If you look at it in the quarter, it was roughly $1.3 billion. Understand, though, that that's largely showing up as potential impact to ROE in ARCC.

I think Kipp and the team at ARCC have done a tremendous job continuing to maintain the earnings trajectory of the BDC in the face of what is now the one-year anniversary of the leverage unwind. So while I think that that's been on investors' minds, the Company is demonstrating an ability to continue to deliver the dividend stability, despite the deleveraging.

As it sits today, the pace of deleveraging has been slightly slower. And we talked about that on the earnings call. I think there's an expectation coming into the new year that there would be a slightly quicker pace of refinancing. And just given the market environment, that slowed. And so as a result, the Q1 ROE on the SSLP asset was actually slightly higher, I think, than market expectation.

It's been orderly. It's been something that we've managed well. Given the size of that program, there's about 38 borrowers in it now from a peak of 54. We would expect it would continue to wind itself down over the course of the next two years.

The other thing that we've talked about, where the market is we continue to explore ways to accelerate the resolution of that program, given the ramp-up in our new joint venture partnership with AIG and Varagon, and those discussions are ongoing.

Great. Thanks for answering the question.

(Operator Instructions)

Doug Mewhirter, SunTrust.

Good afternoon, and good morning. Follow-up question on ACOF V. It's a little speculative, so I'm not sure if you can really answer it very specifically. But would we expect to see the pace of investment at ACOF V increase or decrease if the market -- if the stock market dropped a lot? Because I would imagine you might be tempted to -- you might get better prices and want to be more aggressive if the market dropped.

But maybe the other players, like the people giving you financing, may be more reluctant because the volatility. Or people may be less willing to sell. Just if you could help me understand the dynamic there of how your appetite for capital deployment, depending on where the stock market (multiple speakers).

I think I will try to take it away from the stock market specifically because I think understanding why there is stock market volatility, there can be different reasons for that. I would just remind everybody what we do in our private equity business, because it is somewhat unique.

In our private equity business within the same fund we will make growth-oriented buyout investments, either in platforms or regular way buyouts, largely focused on companies where we can drive value through cash flow growth as opposed to maximizing leverage. And we will execute on distress for control investments, typically taking toeholds when there's market volatility in the debt capital market. And then ultimately acquiring control of companies, largely in consensual deals through their balance sheets.

So when you look at our track record, what is unique about it is we have the ability to make really good returns across the cycle in a different market environments. We have the ability to be much more level-set in our deployment pace, just because we are not dependent necessarily on the availability of leverage or the ability to take public companies private when the valuation environment changes. And so as a result, irrespective of fund size if you go back and look at the track record of both deployment and realization, I would tell you it's been much more consistent than your traditional middle-market buyout fund.

My opinion generally, though, is that if we get into a period of heightened volatility or distress in the capital markets, back to your stock market commentary, that's usually a great time for deployment. And so I think the opportunity ahead of ACOF V, particularly how late we are in the credit cycle, could be a very good one.

Okay. That was very helpful. My second and final question, I apologize for asking another possibly speculative question, but you've done a good job of sort of showing your dry powder and your potential for increasing your fee-earning assets under management, showing that pipeline because -- largely because you've had such tremendous AUM growth.

Given that it looks like we have a pretty steady pace of liquidations now, and maybe you have a higher hurdle to jump over, can we expect meaningful net AUM growth in 2016 and 2017? Meaningful being anything above low single digits percentage.

It's a difficult question to answer. If you look at the history of the firm through market cycles we've been able to generate AUM growth of 15% to 20% pretty consistently. We are coming off, and it's not lost on people hopefully, we are coming off a significant period of fundraising across each of our businesses.

The good news is, we've had very healthy deployment. And so we're coming back to market more frequently, despite the increasing size of our successor funds. So I always have difficulty talking about what's meaningful or what's not meaningful. But if the question is, can we continue to grow the AUM in the low to mid-single digits, I think that that's an eminently achievable goal, despite the fact that we are coming off of a big capital raise in 2015.

Okay, great. Thanks. That's all my questions.

Craig Siegenthaler, Credit Suisse.

Thanks again. Wanted to circle back on M&A. And back in 2008 you did a very creative merger with ARCC and Allied. And I heard your earlier comments on the CLO market. But how are you generally thinking about M&A today, given higher regulatory pressures on smaller firms?

Sure. Well, we think about it a lot as we have talked about, we have a pretty consistent view on M&A that if we are going to do something it has to make strategic sense, make us better at what we do and make them better at what they do. It has to be financially accretive. And it has to be a good cultural fit. And I think you've seen us over the years successfully make acquisitions. And you've seen us over the years walk away from acquisitions where we couldn't check all of those three boxes with conviction.

I think we're going into a period, whether it's risk retention, the regulatory headwinds that the banks are facing, the capital markets' access that some of our smaller competitors are facing, the early signs of credit distress in certain books. There are a lot of catalysts out there for M&A that I think are starting to lead to some really interesting conversations for us. So we think about it a lot. We are always looking. We are always evaluating.

But we do have a very high bar in order to actually execute on a transaction. I'd reference the other comment I made earlier just about the consolidation trend in alternative asset management generally. That's not just a function of organic flows from institutional and retail investors. It's very much going to be a function of M&A opportunities as well. So I think that's going to be a continued part of the story.

Just a follow-up. Can you give us any color on the three new first-generation funds that you referenced earlier on the call?

I'm sorry. Some color on some of the new types of strategies that we are working on?

Yes. So earlier in the call you said there's three new first-generation funds, maybe adjacent funds, that you guys are planning on launching. I was just wondering if you could help us in terms of what asset or product classes those funds would be in?

Sure. I may have not articulated well. I don't think we said the number three, but we are working on a number of adjacent strategies. A good example of that continues to be the growth in our commercial finance business, which is -- was an outgrowth of our core cash flow direct lending franchise. That business continues to raise capital and scale.

We are working on some interesting public equity strategies where we are trying to take advantage of some of the distress in yield stocks generally, given our expertise in the BDC REIT closed-end credit fund space, et cetera. On the real estate side, as we've talked about before, there is an opportunity to continue to expand the breadth of real estate product that we manage, both on the equity and debt side, given our origination and investment capabilities.

As we talk about adjacent strategies, another way to think about them is to step-out strategies We're not necessarily trying to reinvent the wheel or do anything that is brand-new to us. What we're trying to do is leverage core competencies that we have resident in the business and just expand the opportunity set.

Great. Thanks for taking all my questions.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Arougheti for any closing remarks.

I don't think we have any. We appreciate everybody's time and attention today. We look forward to speaking with everybody next quarter. Have a great day.

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 will be available through June 8, 2016 by dialing 877-344-7529, and to international callers by dialing 1-412-317-0088. For all replays the conference number 10083210. An archived replay will also be available on a webcast link located on the homepage of the investor resources section of our website.