Ares Management Corp (ARES) 2020 Q4 法說會逐字稿

Good day, and welcome to Ares Management Corporation's Fourth Quarter and Year-end 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded on Thursday, February 11, 2021. I will now turn the call over to Carl Drake, Head of Public Company Investor Relations for Ares Management. Please go ahead.

Good afternoon, and thank you for joining us today for our fourth quarter and 2020 year-end conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Michael McFerran, our Chief Operating Officer and Chief Financial Officer. In addition, Bennett Rosenthal, co-Chairman of our Private Equity Group; Kipp deVeer, Head of our Credit Group; Bill Benjamin, Head of our Real Estate Group; Scott Graves, co-Head of our Private Equity Group; and Blair Jacobson, co-Head of European Credit, will also be available for the question-and-answer session.

Before we begin, I want to remind you that comments made during this call contain forward-looking statements and are subject to risks and uncertainties, including those identified in our risk factors in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results.

During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. In addition, please note that our management fees include ARCC Part I fees. Please refer to our fourth quarter and full year 2020 earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Ares fund.

This morning, we announced that we declared our first quarter common dividend of $0.47 per share, representing an increase of 17.5% over our dividend for the same quarter last year. The dividend will be paid on March 31, 2021, to holders of record on March 17. We also declared our quarterly preferred dividend of $0.4375 per Series A preferred share, which is payable on March 31, 2021, to holders of record on March 15. Now I'll turn the call over to Michael Arougheti, who will start with some quarterly and year-end financial and business highlights.

Great. Thanks, Carl, and good afternoon, everybody. I do hope that everyone is healthy and wish you well. This morning, we reported exceptional results for our fourth quarter, concluding a very strong year for Ares despite the challenging economic and market conditions brought on by the global pandemic. We achieved records in nearly every financial metric, with full year growth in AUM and fee-related earnings both exceeding 30%. Our AUM growth was driven by nearly $13 billion of gross fundraising in the fourth quarter and $41 billion for the year, both all-time records, as investors continue to entrust more of their capital to Ares and as we continue to demonstrate our ability to generate strong returns throughout market cycles.

Our 44% fee-related earnings growth for the fourth quarter and 31% for the full year were driven by strong top line growth, coupled with margin expansion from economies of scale. We were able to accomplish this while still investing substantially for future growth through the incubation of new products, new platforms and new strategies. Our FRE margins expanded throughout 2020 to a record 37% in the fourth quarter, an improvement of over 500 basis points year-over-year.

Our strong growth in the face of a global health and economic crisis demonstrates the durability and resiliency of our business model and highlights the strong secular tailwinds supporting our business. Our management fee-centric business model generates consistent and recurring earnings from a growing capital base even in volatile markets. This was demonstrated in 2020 as management fees represented 89% of our total fee income, and our fee-related earnings represented nearly 75% of our realized earnings.

The resiliency of our earnings is also illustrated by the fact that nearly 90% of our management fees are derived from permanent or long-term capital. In our view, the long-term secular growth trend in alternative investing is as good as we've seen, and we expect it to continue for the foreseeable future. In a world of very low interest rates and elevated valuations and volatility in traded markets, investors continue to view investing in private assets as a means to earn premium returns and higher current income with less volatility. We believe that there's a significant opportunity for further market share gains for the industry and for Ares based on the value that we are bringing to our investors.

As I mentioned, in 2020, we had a record year of organic fundraising. We took commitments in for more than 350 institutional investors, raising a total of $41 billion, surpassing our previous annual record of $36 billion. To achieve these results, we executed effectively on both large flagship funds and new first-time flagship fund strategies in addition to our ongoing capital raising in permanent capital vehicles, managed accounts, CLOs and open-ended funds.

We held closings for 20 distinct commingled funds during the year, demonstrating the breadth of scale and diversification in our fundraising efforts. In 2020, we saw unprecedented demand for our leading European Direct Lending flagship fund as we closed on EUR 9.4 billion, including EUR 2.4 billion in Q4, a little more than 8 months after our launch. We're nearly 50% ahead of our predecessor fourth fund of EUR 6.5 billion in commitments, and we're already ahead of our target of EUR 9 billion. Going forward, we expect to reach our hard cap of EUR 11 billion or up to EUR 15 billion of total available capital for the fund, including anticipated credit facilities.

We're also well on our way with our second junior capital direct lending fund, holding a first close on $1.9 billion during the fourth quarter. Our sixth corporate private equity fund has now reached more than $4.1 billion of commitments and is off to a great start with respect to deployment. Specifically, we committed approximately $1.5 billion to new investments in 2020 on behalf of our sixth corporate PE fund, largely executed in the midst of the crisis, with about half in traditional investments and half in distressed investments at attractive entry points.

We continue to raise 2 larger flagship real estate funds as well with our third U.S. real estate opportunistic fund reaching more than $1.3 billion, and we expect to exceed our $1.5 billion target and our third European value-add fund ended the year at nearly EUR 600 million on its way to its EUR 1 billion target.

During 2020, we also demonstrated successful raises in our newer product lines, led by teams of proven business builders. A good example of this is our Private Equity Group's inaugural Special Opportunities Fund I, or ASOF I, where we closed at our hard cap of $3.5 billion in mid-2020, which compared favorably against our $2 billion target. Our special opportunities team started investing ASOF I in 2019 and was very active during the pandemic. ASOF I is now approximately 70% invested and committed in distressed and other special situation investments.

As I'll touch on in a moment, the fund's strong performance demonstrates the efficacy of this strategy, and we now expect a larger successor ASOF fund to be launched later this year.

In alternative credit, our inaugural flagship fund, which launched with an initial target of $2 billion, now stands at over $2.7 billion, and we expect it will hit its recently increased hard cap of $3.6 billion shortly. For the year, in total, the Private Equity Group raised $6.2 billion, and the alternative credit team raised $5.5 billion in total across all funds. We expect the special opportunities and alternative credit strategies to grow into even more significant businesses for us going forward.

Looking forward, we expect 2021 to be another strong year of fundraising, with the opportunity to exceed our 2020 record of $41 billion. In addition to our ongoing fundraising across new and existing managed accounts, permanent capital vehicles, CLOs and other funds, our pipeline includes more than a dozen flagship funds targeting $1 billion or more across each group, including a few new strategies, such as our inaugural Sports, Media and Entertainment Fund and a new Evergreen Income Fund focused on alternative credit.

Importantly, we're much more diversified with more than 4x the number of commingled funds in the market targeting $1 billion or more compared to 5 years ago. We also have larger permanent capital vehicles today that continue to scale, more open-end funds and a more robust strategic managed account platform. The breadth and diversity of our platform have evolved us to be in continuous fundraising mode versus the old model of being in a "fundraising cycle." As a result of all this going forward, I'd expect our annual fundraising totals to exhibit less variability year-over-year than in the past.

I think 2020 also underscores the importance of having extensive relationship networks, flexible capital and large incumbent positions to drive differentiated investment. With the exception of the fourth quarter, private market transaction levels were comparatively slow in 2020, making relationships, deep industry expertise and flexible capital solutions even more important in sourcing attractive investments. That said, our 2020 deployment nearly matched our 2019 record levels as we invested approximately $27 billion, including more than $21 billion in drawdown funds with $7 billion in Q4 alone.

For the year, our deployment activities were led by our European and U.S. direct lending platforms, where we funded over $10.5 billion in nearly 200 middle-market companies, with about half of our transactions supporting incumbent portfolio companies. The alternative credit team had its busiest year ever, deploying $2.8 billion across its strategies and trading more than $6 billion in liquid securities. Our global liquid credit team also had its most active year, with tactical trading and securities of $45 billion and deployment of $4 billion from its new funds.

Within Private Equity, the group invested $5.4 billion in 2020, about equally split between traditional and distressed investments, with most investments in our corporate private equity and special situation strategies made during the height of the pandemic at very attractive entry points.

Our real estate team invested $2.3 billion, primarily focused on their high-conviction sectors of industrial and multifamily in both the U.S. and Europe, as well as increased exposure to other alternative real estate asset classes such as single-family rental and student housing. Ares SSG also took advantage of the market dislocation and deployed $1.7 billion in its senior lending and special situation strategies across its Asia Pacific footprint.

Despite the volatility, we also experienced a solid year of realizations, most notably within Private Equity, where we had more than $5 billion of exits in both the private and public markets. On the public side, we were able to capitalize on the growing stay-at-home trend with our portfolio companies, Floor & Decor and the Azac Company, which went public in mid-2020. The success of these public companies enabled us to monetize a portion of our public portfolio, and together with selected exits in the private markets across strategies, deliver attractive realized performance income to our shareholders.

The public markets remain conducive to additional opportunities into the new year. In the first quarter of this year, our ACOF portfolio company, MyTheresa, a leading European luxury e-commerce platform, completed a very successful IPO against strong demand. The stock has responded very favorably with strong appreciation since the company's debut. With the AZEC Company up 70% since its IPO last year, we were also able to monetize a portion of our holdings in January.

And finally, we're pleased with the strong market reception for our first SPAC, Ares Acquisition Corporation, which was upsized to be 1 of 5 SPACs currently active in the market to reach the $1 billion mark in its debut last week. Assuming continued favorable market conditions, we would expect SPACs to be a new product line for Ares and hope that this is the first of a number of generalist and targeted SPACs that we raise in the future.

In our view, our strong fund performance for both the fourth quarter and 2020 highlight the many advantages of our platform. Our credit strategies delivered strong returns for our investors with minimal loss rates. Despite going through a severe economic downturn, credit returns were positive for the year across our major credit strategies. Gross returns range from 3% to 4% in syndicated loans and 6% to 7% for high yield, outperforming their respective benchmarks by 30% and 10%, respectively.

Our European direct lending returns were more than 6%, and Ares Capital generated strong net returns of 8% for the year. Our special opportunities fund within our PE group was a standout in 2020, ending the year with a 54% gross return for 2020 as the team invested meaningfully during the market volatility, particularly in the first half of the year, and since inception returns, were greater than 70% on a gross fund level basis at year-end.

Our corporate private equity returns within our ACOF composite appreciated strongly in the fourth quarter with a gross return of 8.5%, ending the year up just under 10%. Our real estate private equity group materially outperformed the public real estate market indices for the year. In a year where the U.S. and European public REIT indices were down 8% and 13%, respectively, our U.S. and European equity composites generated gross returns of 15% and 2%, respectively.

Our real estate outperformance was due to our strategic focus on the 2 best-performing asset in real estate for 2020, multifamily and industrial, with significant underweights in both the hospitality and retail sectors. Another focus for the year was on our strategic initiatives. We closed on our strategic acquisition of Ares SSG in July, and we closed F&G Re for our insurance affiliate, Aspida, at the end of the year. We believe the growth opportunities in Asia and across the insurance sector are both significant and highly strategic for our longer-term plans as we roll out new products in these areas.

Both businesses are off to a great start with talented leadership in place and identified promising growth prospects. Ares SSG expects to launch its sixth flagship special sits fund in the second half of this year. And they're collaborating actively with our strategic partner, SMBC, in developing certain new products in Asia Pacific.

Our Ares Insurance Solutions unit is supporting the growth of Aspida's Reinsurance business, and it's also focused on building out the infrastructure to offer onshore insurance products to the retiree market. With our leading noninvestment-grade credit platform with more $145 billion in AUM, we believe that we're well positioned to help Aspida's scale in the insurance sector by leveraging our distinct competitive investing advantages and distribution relationships.

And lastly, from a personnel standpoint, we continue to enhance our talent across the platform with net addition of 200 employees in 2020. This helps us maintain our leading direct sourcing platforms across the globe that have become so valuable as we scale and serve our investors. As we grow, we continue to attract talented professionals who want to join Ares to make an impact across both our investing and non-investing areas.

Two additions to highlight in noninvestment areas are our new Head of ESG, Adam Heltzer, who joined in April; and our new Head of Diversity Equity and Inclusion, Indhira Arrington, who joined last month. Indhira will help us build upon the great strides that we've already made in DEI over the last several years, including in 2020, where we served as a founding signatory on ILPA's Diversity and Action Initiative and were recognized by Exelon on their 2020 Inclusion and Diversity Honor Roll.

In the fall of 2020, we also achieved the certification as a Great Place to Work from our employees. And in January of this year, we achieved a 100% score on the HRC Corporate Equality index. We were also very active in our communties in 2020, with more than 300 employee volunteers participating in 10 nonprofit events. ESG and DE&I are critically important to us and our stakeholders, and we expect to be at the forefront of change in our industry in the years to come. Let me now turn the call over to Mike McFerran to walk through the fourth quarter and full year financial results. Mike?

Thank you, Mike. Hello, everyone. I hope all of you are safe and well. I will start with the review of our results for the fourth quarter and the full year, then I will provide an update on where we stand nearly midway through the first quarter of 2021.

Before going into the details, I will highlight that our fourth quarter results not only reflect the strong growth trajectory of our overall business, but they also reflect our greater scale as we broke financial records in nearly every category this quarter, with record capital raising, FRE, AUM, fee-paying AUM, dry powder and AUM not yet earning fees.

Our realized income was likewise strong, reflecting our record FRE and strong realizations across our businesses. We ended the year with our fastest growth rate of both AUM and fee-paying AUM in over a decade. For the fourth quarter, FRE totaled $127.6 million, an increase of $20.7 million or 19% from the third quarter of 2020 and an increase of $38.9 million or 44% from the fourth quarter of 2019. FRE for the year ended December 31, 2020, totaled $424.5 million, an increase of approximately 31% from 2019. Our FRE for the fourth quarter and year-end December 31, 2020, reflect an FRE margin for the quarter of 37% and 35% for the entire year of 2020. This represents nearly a 400 basis point increase in our full year margin as compared to full year 2019.

FRE for the quarter was driven by record management fees totaling $335 million, an increase of approximately 23% over the fourth quarter of 2019. For the full year, management and other fees totaled over $1.2 billion, an increase of over 17% from 2019. Management fee growth for the fourth quarter reflected seasonally strong deployment and the fulfillment of some pent-up demand, including record commitment to originations from ARCC of more than $3.8 billion for the fourth quarter, which resulted in ARCC Part I management fees being about $15 million higher than the prior 3-quarter average. This resulted in an above-average FRE contribution of about $6.3 million for the fourth quarter.

Management fees also included the partial activation during the fourth quarter of our sixth corporate private equity fund, which has paid a committed capital of approximately $4 billion. As a result, the management fee basis and rate step-down for our predecessor, fifth corporate private equity fund on January 1, but the impact will be partially offset by a full quarter of management fees from our sixth PE fund. Importantly, this is a moving target as we continue to fundraise for our sixth corporate private equity fund, future closes will increase management and catch-up fees with each interim closing of LP commitments.

Turning to expenses. Compensation and general and administrative expenses grew by approximately 13% and 11% from the fourth quarter and full year 2019, respectively. Our revenues continue to grow at a faster pace than our expenses, which supported margin expansion for the fourth quarter and full year. Realized income for the fourth quarter totaled $186.2 million, which is up sharply from our third quarter but down modestly from our record fourth quarter of 2019. Our Private Equity Group generated over $1 billion in realizations in the fourth quarter, driven mainly by the sale or partial sale of 2 private portfolio companies. For all of 2020, we had private equity realizations of over $5 billion, as Mike stated.

After-tax realized income per share of Class A common stock, net of preferred stock distributions, was $0.54 for the fourth quarter, down from $0.67 in the fourth quarter of 2019, but full year 2020 after-tax realized income of $1.86 per share of Class A stock was up 11% versus 2019. I do want to touch on our effective tax rates for 2020 and 2021. With respect to our 2020 taxes, our full year effective tax rate on realized income, assuming all shares were converted to Class A common stock, was approximately 11.5%, with a tax rate on fee-related earnings of approximately 7%. While our tax rate is the function of numerous variables, we currently estimate these effective tax rates for 2021 will be in the 8% to 13% range for realized income and 4% to 8% range for fee-related earnings, assuming 100% of our shares were converted to Class A common stock.

This brings me to our annual dividend discussion. As a reminder, we peg our annual dividend to our expected growth in after-tax fee-related earnings per share. Based on our strong growth prospects, we have elected to increase our annual dividend for 2021 to $1.88 per share of Class A common stock, up 17.5% from our $1.60 per share for 2020. Accordingly, our Board declared our first quarter common stock dividend to be paid on March 31 of $0.47 per share, as Carl stated.

Next, I'll turn to our AUM and related metrics. As of year-end, our AUM totaled $197 billion compared to $179.2 billion for the third quarter, a quarterly increase of nearly 10% and up more than 32% versus $148.9 billion at the end of 2019. Our AUM growth in the fourth quarter was largely driven by organic growth and strong asset appreciation, including gross new capital commitments of $12.8 billion and market appreciation of $5.5 billion. In addition, Aspida's acquisition of F&G Re added $2.2 billion during the fourth quarter.

Our fee-paying AUM totaled $126 billion at year-end, an increase of approximately 12% from the third quarter of 2020 and 30% from the year-end 2019. Our growth in fee-paying AUM was primarily driven by meaningful deployment in our global direct lending, special opportunities and alternative credit strategies and new commitments across all 3 groups.

Our available capital increased to a new record high of $56.3 billion, an increase of over 62% year-over-year. We ended the quarter with $40 billion of AUM not yet earning fees, of which approximately $37.1 billion is available for future deployment and if deployed, corresponds to potential annual management fees totaling $401 million, which would be a 30% increase over the fourth quarter management fee run rate. With a significant available capital and dry powder, we remain very optimistic on the potential growth prospects ahead of us.

Last, our incentive eligible AUM increased by nearly $30 billion to $117 billion, and of this amount, $46.5 billion was uninvested at year-end. The fourth quarter saw continued appreciation of our net accrued performance income balance, which now sits at $364.7 million. This represents a 13% increase from the third quarter and a 5% year-over-year increase from the end of 2019, despite substantial realizations over the course of the year. With record levels of incentive-eligible AUM, including more than $46 billion that is uninvested, along with our net accrued performance income, we believe we have the foundation in place to generate and recognize meaningful long-term value for shareholders through additional performance fees over time.

I'd next like to take a moment to address our very strong financial position and capital structure. We ended the year with over $1.5 billion in available liquidity. Between our $540 million in cash on the balance sheet and no amounts drawn on our $1.065 billion corporate revolving credit facility. Our liquidity at year-end has us well positioned to continue to support the organic growth of our firm as well as be positioned to pursue continued inorganic strategic opportunities if and when they arise.

Before turning the call back to Mike, I do want to provide our thoughts on our future outlook from a financial point of view. The capital raised to date resulted in us ending the year with over $37 billion of AUM not yet earning fees available for deployment, with corresponding potential annual management fees of over $400 million. And as Mike mentioned earlier, we are expecting 2021 to be another very strong year of fundraising.

Accordingly, we are very well positioned to continue to drive management fee and, in turn, FRE growth in the years ahead through the capital we have raised and continue to raise. While we anticipate it may be difficult to match our record fourth quarter's fee-related earnings to the first quarter of this year, I do want to reiterate our prior guidance that we expect to be able to generate year-over-year FRE growth of 15% or higher for 2021 and years ahead. And we do expect to achieve a run rate 40% margin in less than 3 years from the end of 2020. I'll now hand the call back to Mike for his thoughts on our future outlook and concluding remarks.

Great. Thanks, Mike. We've always said that Ares is a business that can perform throughout various market environments but that can particularly outperform in difficult markets. In our view, 2020 was a year that validated this all-weather business model. We have long-dated, locked-up capital and durable management fee-centric revenue streams that aren't impacted by significant mark-to-market volatility. We have strong liquidity and capital markets access as well as a robust fundraising engine that allows us to grow through challenging markets.

We also have considerable investing and information advantages that drive consistent outperformance through cycles. I believe that we have a best-in-class team. This is all against the backdrop of a long-term growth trend in alternative investments. Our products are growing more relevant as investors remain frustrated with low interest rates and the dual challenges of high valuations and volatility in the traded markets. We're seeing investors consolidating the relationships among fewer trusted asset managers, and we continue to have strong success, expanding our share of our client dollars with larger successor funds, new strategies, strategic managed accounts and by opening up new channels within retail and insurance.

Heading into the new year, we continue to be very excited for our organic and inorganic growth opportunities. We have a growing sticky client base of nearly 1,100 institutional investors and hundreds of thousands of retail investors that help fuel our growth with their appetite for additional Ares products. In 2020, more than 80% of our new capital raise was derived from existing clients, which we believe is the best validation of their satisfaction with our performance and their investment experience.

We have record amounts of available capital that we can deploy for future growth in the years to come. With over 500 investment professionals in over 20 offices in more than 10 countries, we're well positioned to scale our sourcing and investing appropriately across our many strategies and geographies. And from a strategic expansion standpoint, we're prioritizing the many growth opportunities in highly strategic large end markets where we can exploit our distinct competitive advantages.

Our 2020 results illustrate the strong performance and growth of several of these businesses and strategies, including our special ops strategy in our PE group, alternative credit in our credit group, Ares SSG and growth and broadening of our real estate group. The investments that we've made in these businesses have been firing on all cylinders with respect to performance, capital raising and overall business momentum.

We believe that these businesses illustrate some of the many areas that will drive long-term growth for Ares and value creation for our shareholders in the years ahead. As I sit here today, I believe that our growth prospects have us as well positioned as at any time in our history, particularly as we continue to scale and realize the full potential of the new businesses that we're building.

And with that, I just want to end by expressing how impressed by and proud I am of the hard work and the dedication of our team and how grateful I am for all that they're doing every day to deliver for all of our stakeholders during these challenging times. I'm also deeply appreciative of all of the support from our investors for our company, and I thank all of you for your time today. And with that, operator, I think we will open up the line for questions.

(Operator Instructions) Our first question today will come from Craig Siegenthaler with Crédit Suisse.

So Michael, I wanted to start with your forward commentary on the SPAC pipeline and the sustainability of this trend because besides a pretty expensive stock market and very high retail engagement, what else are you seeing that could drive a continuation of the SPAC wave? And then my second part on this is thinking about it a different way, how is this impacting the investing efforts to the private equity industry?

Sure. It's interesting because obviously, there's a little bit of a SPAC frenzy. It reminds me a little bit of what we experienced when we launched our BDC 15 years ago in 2003, 2004 when there was a similar frenzy and then kind of a settling out and evolution and maturation of the business. So tell you what you know, SPACs have been around for quite some time and supply-demand has ebbed and flowed.

Clearly, the liquidity in the market is driving a lot of issuance. And I think we're going to see dispersion in performance over time in the way that we've seen when new capital markets technologies come into the market. I think that Ares and others like us are actually well positioned to differentiate not just in terms of size but in terms of the go-to-market strategy. So I think to put it in perspective, when you look at where a lot of the SPAC volume is coming, it's smaller, nonsponsored, if you will, focused pools of capital.

When you look at what we're trying to accomplish, this is really a cross-platform opportunity. We think that we're going to bring differentiated origination, infrastructure and relationships, unique market insights. Obviously, a very long track record of growing companies in the public market, both from an operational standpoint but also a public IR standpoint. So I think we're going to have to begin to try to differentiate institutional quality sponsorship from non-. That's comment number one.

Comment number two, similar to the BDCs or the mortgage REITs or anything else, I think anytime that we see opportunities for increased capital formation for companies, that's a good thing. Over time, with performance and experience, you'll start to see the structures potentially morph and change. But I think it's filling a need in the markets that is somewhat evidenced by the demand, which is if you look at the structure of the public markets leading up to 2020, for the last 15 to 20 years, the number of public companies has been in consistent decline. That's obviously been one of the big drivers of the private market trend that we're benefiting from. The market cap in public markets has been increasingly concentrated.

And I think that there's been a view that in some respects, the retail investor has been disadvantaged or crowded out. So the idea that we're seeing innovation and capital formation, I think, is a big positive. And while there's a little bit of excess in the market, I think that it's indicative of people's appetite to access these types of companies where they didn't really have access before.

In terms of what it means for PE, I think that still remains to be seen. I think it's important that people appreciate what makes a good leverage buyout candidate does not necessarily make a good SPAC candidate. What makes a great public growth company does not necessarily make a great private entity. And I think what we're finding, which is why we have so much confidence in the structure sitting alongside our PE franchise, is most companies that want to go public are going to go public. And what we're finding, whether we're buying companies or selling companies, the opportunity to look at a SPAC execution or private markets execution is going to be a pretty meaningful origination advantage for us.

So we think at least for our PE franchise, it's additive and supplements what we do and should make us a better originator. I do think that this will chip away a little bit at the aggregate market opportunity for PE when you just look at the amount of capital searching for transactions. And candidly, it will also chip away a little bit on the venture side and the growth equity side as well. But I think plenty of opportunity out there, and we're just going to have to see how it all plays out.

Our next question comes from Chris Harris with Wells Fargo.

So on their earnings call last night as part of the earnings release, AMP mentioned that they're having dialogue with Ares about the sale of its asset management business. Can you guys comment on that? And related, are you looking at that entire business or just the alternatives component?

Sure. I can't comment in great detail but maybe just to take a step back because it came up on our last earnings call as well. Obviously, we have a very well-developed corporate strategy team that is opportunistically looking for areas of expansion inorganically and organically. And we react to what the market shows us.

This is a unique situation because obviously, AMP Capital has a strong global footprint in the private markets. I think that the comments from AMP accurately reflect where we are, which is that there is no transaction on the table for the entire company and that we are having some constructive dialogue with them about transaction structures and partnership opportunities around their asset management business. I think that's all we can say for now. But as soon as we have more to tell folks, we're obviously going to do that.

Okay. A quick question for Mike McFerran, if I can. Hey Mike, it sounds like there's a lot of moving parts with the management fee outlook for at least Q1. Can you maybe help us with understanding what the impact is from the step down of ACOF V in dollar terms?

Sure. I think as I said in the prepared remarks that ACOF VI turned on during the quarter, ACOF V stepped down Jan 1. So to your point on moving parts, the way I think about the impact is based on the current size of ACOF VI, the impact would be ACOF V's effective step-down for a full quarter offset by ACOF VI for a full quarter is about $6 million.

That being said, again, I'd really emphasize that the timing of the incremental future closings of that fund as you get paid on committed all the way back to first close would result in some volatility there. As you have closings, you're going to have catch-up fees hitting those quarters where those closings occur. So a lot of it is just going to be based on when the next closings occur. So you might see a little noise in Q1, but I think as a percentage of overall management fees, not overly significant.

Our next question comes from Mike Carrier with Bank of America.

Maybe first one, just on deployment. I mean, given some of the higher valuations, the improving economy, a lot of capital out there, just how is the opportunity set maybe changing? And can you provide some context, just given how active you've been on the credit side, maybe where some of the valuations in terms of what you're seeing differs from like the public market and how you're thinking about the return outlook from here?

Sure. It's a fascinating deployment environment. It's quite unique and we talked about this heading into Q4 on our last earnings call. What's so unique is, obviously, we've got high valuations and liquidity in the traded debt and equity markets that are reflecting higher valuations and a fairly bullish view on both forward earnings, technical liquidity in the markets and increased stimulus. That is still a little bit detached from the fundamental economic reality in the economy.

And so when you think about what's going on, you've got to really think about public versus private rel val and then COVID-impacted versus non-COVID-impacted rel val. And what's so unique about this opportunity for us is based on that bifurcated market but also the number of strategies we have, the deployment has been very balanced. We had a record quarter in our private credit businesses in Q4 in a regular way, kind of non-COVID-related new issues. And we had a significant deployment quarter in and around the stressed and distressed parts of our business in private equity, special opportunities, alternative credit, real estate, et cetera.

So unlike prior cycles where we kind of see disproportionate distressed or disproportionate healthy company investing, it's been very, very balanced. As a good example, I mentioned in our PE business, we had very active deployment in the depth of the crisis at really good entry points, both distressed and then coming into the fourth quarter regular way. So I would expect it to be a healthy deployment environment for us going into 2021 because of that. Obviously, the markets are healthy, and that typically spurs a lot of transaction activity.

The benefit also to the traded markets being a little bit disconnected from the private market is obviously, it shows up in our ability to monetize. So as we talked about in the prepared remarks, when you look at our opportunity in places like AZEC and MyTheresa and others, the public markets are obviously pretty supportive for monetization. And they're pretty constructive as we think about our liability profile and how we fund ourselves. And so whether it's at Ares Management or at Ares Capital Corporation or ACRE, hopefully, people are seeing us take advantage of that market backdrop to drive the cost of our debt and cost of our equity down.

Okay, that's helpful. And then just on the strategic front, you guys have been active on launching new strategies on the geographic front. But your comment on 80% fundraising coming from current investors, as you said, is a good thing. But I just wanted to get an update on the LP base, in the growth outlook, particularly just given so many product opportunities on the platform and some of these newer ones kind of scaling up going forward.

Yes. It's a great question. I think we've talked about this before, and I would encourage people to look at some of the public available information in terms of our investor count because typically, when you look at the fundraising, it's about -- in terms of number of investors, it's typically about 50-50 existing investors. But when you look at capital, it tends to skew to 70% to 80% of capital coming from new investors.

So the fundraising cycle or life cycle of investor here, if you will, is they'll typically start in 1 part of our platform with a core commitment. And then over time, they will not only grow in that part of our business with increasing commitment sizes but then begin to invest across the platform. So when you look at the number of investors, the number of investors is steadily increasing year-over-year despite the fact that we're monetizing greater wallet share with those investors.

So if you go look at our investor presentation, you'll see a nice depiction of how that plays out in terms of the percentage of investors that are getting cross-sold, if you will, into multiple funds in a given strategy but then also investing across multiple business lines at Ares. So we continue to put a lot of global resources against our asset gathering and investor relations infrastructure. It continues to pay significant dividends.

But telling you what you know, the global demand for our product is significant and growing as well. So it seems that the more resources we put against it, we're just uncovering tons of white space. So I would expect that trend to continue.

Our next question comes from Gerry O'Hara with Jefferies.

Maybe one for Mike McFerran, and as it relates to the kind of glide path towards 40% or more in FRE margin. Can you perhaps -- I assume ACOF VI is probably a big driver of that. But can you perhaps give us a little color as to what some of the other kind of material drivers of that margin expansion might be and even if it's just kind of scale in the business? But any color would be helpful.

Sure, Gerry. We -- I said a couple of quarters ago that if you looked at us in the last few years, we were expanding the margins, on average, between 150 and 250 basis points a year. Clearly, 2020, as Mike talked about in the deployment statistics, was a great year of revenue growth with managed expense growth, and that enabled us year-over-year to grow the margin 400 basis points. So to your point on that glide path, I don't think it's really a function ACOF VI per se because that's one fund out of many.

It's -- I think the biggest thing I would look at is AUM not yet earning fees and the potential $400-plus million of management fees tied to that $37 billion of undeployed capital. As that capital gets deployed, that's coming in at a much higher margin than we're operating at because the expenses to invest to manage that capital are in [C] today. So it's really a function of timing of deployments. And when you have quarters like the fourth quarter where we had a great deployment, you see the margin benefit from that because there's not necessarily a corresponding expense that goes with it.

So we said a couple of quarters back, we thought we'd hit the run rate 40% in 3 years or less. I reiterated that in my prepared remarks. Clearly, of us having 37% this quarter and 35% for the year, it feels like we're definitely on that path. But it's not a function of a given fund or anything else. I think we continue to manage expenses effectively as we have for several years and putting that existing capital to work.

Okay, that's definitely helpful. And then maybe one, just on the insurance initiative with the closure of F&G, and I think in the prepared remarks, I think there was some comments around kind of new initiatives forthcoming, but any additional kind of comments might be -- you might be able to kind of add there or even appetite for future strategic opportunities as it relates to the insurance initiative would be helpful.

Yes. I don't think that there's anything new so I'll just reiterate what we've said before, which is obviously, it's a huge addressable market, both in terms of reinsurance and the annuities market. We believe that given our positioning as one of the largest global credit managers, that we're uniquely positioned to source unique assets and excess return for all of our insurance clients, including Aspida and Aspida Re. You'll see that just in the growth of our insurance client base over the years as we put more attention on that. And so today, we probably manage in excess of $10 billion for over 120 insurance clients.

And obviously, as we get smarter around transaction structuring and partner with these insurers, it gives us a lot more confidence going into the market to originate unique assets for them up and down the capital stack. The pieces are in place now for us to both organically and inorganically scale the Aspida platform and that's what we're going to continue to do. And as we've mentioned, obviously, we've made a meaningful balance sheet commitment to do that. We are adding appropriate resources in our insurance solutions platform to support that, and we continue to have very productive dialogue with our large LPs around strategically funding that business as well.

Our next question comes from Alex Blostein with Goldman Sachs.

Mike, I was hoping to get your kind of latest thoughts around sort of your opportunity set in the retail market. Obviously, you guys have ARCC, but curious if there are other more kind of continuously raising retail vehicles you guys are thinking about in the private credit space, like we've seen with some of the other players in the space.

Sure. It's a great question. As we've talked about, retail is a big area of focus for all of us. I think we've been early and successful in that trend through traditional structures. Obviously, ARCC is effectively a way for retail investors to access our private credit franchise. And that company continues to deliver consistent performance, same with the mortgage REIT and our closed-end credit fund.

We have had some meaningful success. We haven't really talked about it a lot, but with our diversified credit interval fund, CADC, CADX, that's upwards of $1 billion of equity NAV at this point and I think about $1.4 billion of assets and growing. We think that's a pretty unique growth vehicle for us in the interval fund format.

And then I think we, like our peers, will continue to try to innovate. The challenges we innovate is delivering the excess return in the private markets while solving for some liquidity needs for the retail investor, and that's really been the challenge, I think, we and others are beginning to solve for that and we're seeing scale.

I would expect as we continue to build our brand within that channel that you should expect to see us with other products, whether that's non-traded REIT product or net lease product and things like that, we continue to focus on it. So I think you'll see growth there. I think you'll see innovation. I think we're uniquely positioned, given our credit business, to create portfolios that meet that excess return with liquidity profile that's required to satisfy the retail market. And so more to come on that but an area that we're spending a lot of time on and actually having some pretty meaningful success.

Great, perfect. All right. We'll stay tuned for that. And my follow-up question for the other Mike. I guess, maybe a little bit of a higher level FRE question. But I guess if we look at the FRE momentum in the business over the last 2 years, right, like FRE grew 30% in 2020, it grew 27% in '19. When you guys talk about 15-ish percent FRE growth or maybe it's a little bit over 15%, it's kind of harder to reconcile, given the recent trends plus the super cycle plus the deployment, right? So is this essentially just kind of a degree of conservatism or is there something that we're missing from the kind of recent FRE growth trajectory versus what you're seeing on the forward?

No, there's no -- there's nothing we're aware of that's a headwind we're anticipating. Look, I'd emphasize, we've used 15-plus percent. And I know when you look at this year or last year, clearly, you could look at that and say, are we just being too conservative? But we use that not just to talk about '21 but we used to talk about that for the next several years ahead. And I think that's, in my mind, the key point is the way the business is set up and the amount of dry powder we have with management fees that have not yet turned online, kind of creates great visibility for us and continued revenue and FRE growth for the years ahead.

And then I kind of think about a lot of the strategic stuff that we're building today that Mike's talked about. A lot of that's really about going to be driving FRE growth in 2024, 2025 and beyond. So again, I don't intend to be unnecessarily conservative but that's why I would emphasize, that's why we always say 15%-plus.

Yes, perfect. Yes, I just want to make sure we're not zoning in like any particular year. That's perfect.

Our next question comes from Robert Lee with KBW.

Most of them have been asked but just 2 quick ones. And Mike, I apologize if maybe you touched on this earlier. But with all the new products in the pipeline and out there fundraising, a lot of peers have also talked about raising kind of tech products or growth of your products. And from that your stake, you guys have always had a little bit of a growth orientation in your PE business maybe at least relative to peers. So can you just -- kind of curious if that's a potential area you're looking at. And then maybe secondly, just as it relates to the insurance strategy, just kind of where things maybe stand with Pavonia at this point?

Sure. The simple answer to your first question, Rob, is yes. I think what we and our peers are experiencing is with our increasing scale, we are taking disproportionate wallet from our LP clients collectively and frankly, disproportionate share in the market in terms of the investment opportunity. So I think we and others are uniquely positioned to onboard teams, make acquisitions and then bring the competitive advantages and the benefits of scale to those platforms and accelerate growth and performance. And so I think that you should expect to see that from us, as you've seen in the past.

Interesting, when you look at what I think we're great at on the equity side, you really start dissecting our track record, some of our strongest franchises are in health care, technology and financial and business services. And so given our middle market experience and the relationships that we have there, it's a pretty obvious adjacency for us to leverage that into the growth end of the market and something we spend a lot of time talking about.

With regard to Pavonia, I think we hopefully are coming to a resolution there. I don't want to be too committal here, but obviously, we have gotten sideways a little bit in terms of the level of distress that the selling shareholder of that company is undergoing. We've been working with the regulators to try to reach resolution. We think that we're getting close. To the extent that we're not, we are already planning for what that contingency is just, given the amount of momentum that we have elsewhere in the business. So hopefully, we'll have a little bit more detail to talk about next quarter in terms of the resolution of that specific transaction but then also some of the other things we're doing to accelerate the growth of the annuities platform as well.

Our next question comes from Michael Cyprys with Morgan Stanley.

I wanted to follow up on some of the headcount additions you guys have made. So it seems like you're making some investments here on the direct sourcing origination side. I was just hoping you could elaborate a bit more on how you're going about building that out. Where specifically are you expanding direct sourcing? And maybe you could talk about what you've been doing there. And as you look out over the next year or so, I guess what would be next on your to-do list as you think about expanding that out further?

Yes. I don't want to sound cavalier with the answer but the simple answer is everywhere. At the end of the day, originations drives performance. The more deal flow we see, the more selective we can be, the better we can apply our relative value lens and theoretically, the better our investment performance. And I think we were early in learning that. And as a result, I think that we were early in making the investments in the global sourcing apparatus that a lot of other people didn't.

And we add in mature businesses. So as an example, if you look at our European direct lending business, by all accounts, we have the market-leading franchise there but we are opening up new geographies. So we've now, in 2020, opened up an office in Amsterdam. We've opened an office in Madrid. And so you'll see us expanding geographically in mature businesses.

You'll also see us expanding geographically in private equity. So we've been meaningfully building out our European team heading into Fund VI. Deployment there has been strong, leveraging our existing footprint and we'd expect to continue to invest there. So similar to my comment on the fundraising, given the capability set we have and the capital, the marginal return on adding origination and investment people here is pretty high. And so while you will see us growing new businesses with a little bit more concentrated headcount addition, like we did with special opportunities or like we did with alternative credit, the simple answer is it's pretty well dispersed across the entirety of the platform, and that's just the nature of the growth that we're driving.

Maybe just on the credit side, would you be able to elaborate a bit more on, I guess, how would you characterize the focus on sponsor finance versus nonsponsor finance origination? And then specifically on the nonsponsor finance, asset-based lending and so forth, would you be able to elaborate on how you've been building out those sourcing capabilities and how you're thinking about that looking forward?

Sure. It's a great question. And again, I think we've had a meaningful head start in the growth of our global private credit franchise. The sponsor business continues to grow, just to put our direct lending franchise in perspective. I think last year, we did 220 discrete transactions, committed over $20 billion to about 190 separate companies, and that was coming through close to 2,400 deals. So that machine is fully cranked up. And what that allows us to do, to your point, is invest in nonsponsored and industry-specific teams.

And so we've been resourcing our traditional corporate business along new industry verticals, like software and technology, health care and life sciences, energy and energy infrastructure, sports, media and entertainment. And so we have shown a pretty high level of success spinning up industry teams where we think that differentiated industry sourcing and information can help us drive better returns. I think we'll continue to do that. We've done more of that in the U.S. so I think that's a big opportunity for us as we develop more capability in Europe and Asia.

ABL, I just want to clarify, we are meaningful players in both ABL and ABS, meaning asset-based and asset-backed. Our Ares Commercial Finance business, I think, is one of the leading non-bank asset-based lenders with regard to working capital lines and revolvers. And our alternative credit business is very quickly becoming a scale player in all things asset-based and asset-oriented.

I think that is a very significant untapped market opportunity for us across the risk return spectrum. And so we are adding a significant amount of resources there and we have over the last couple of years.

And our last question will come from Adam Beatty with UBS.

Wanted to ask about Australia. You already talked about AMP a little bit, but just to broaden it out, how you're seeing the environment there in terms of both fundraising and deployment, and also maybe an update on the existing JV there.

Sure. So Australia is a good growth market for us. We've been adding people and capital on the primary investment side. Obviously, it's a developed market, and so some of the traditional private credit and private equity-oriented strategies that we have are very relevant in the Australia and New Zealand market. Some of the earlier questions around our potential acquisition and partnership activity there is probably a good indicator of our views of the opportunity set.

Our joint venture with Challenger-Fidante is doing what we hoped it would. We've launched our first product into the market. Early signs are, it's being well received and we're continuing to work on product development through that joint venture with a fair amount of success. So still early but cautiously optimistic based on the early returns from the funds that we put into that joint venture.

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

We don't have any other than to again, wish everybody well, stay safe, and we do look forward to hopefully seeing everybody in person in the not-too-distant future. And we'll talk to you 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 will be available through March 11, 2021, by dialing (877) 344-7529 and to international callers by dialing 1 (412) 317-0088. For all replays, please reference conference number 10150592. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website.