Before we get started, I've been asked to direct your attention to important disclosures on the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Good afternoon, everyone. Welcome back to Morgan Stanley's financials conference. I'm Mike Cyprys, equity analyst covering brokers, asset managers, and exchanges for Morgan Stanley Research. Welcome to our Fireside Chat with Ares Management. We're excited to have with us today Michael Arougheti, who is President and CEO of Ares Management, and Mike McFerran, Ares Management CFO and Chief Operating Officer. Ares Management is a leading global alternative investment manager with about $227 billion of client assets under management invested across credit, private equity, and real estate, to name a few of the strategies. Mike and Mike, thank you for joining us today. Hi, Mike. Thanks for having us. Appreciate it. Great. Why don't we dive right in? It's been a busy year for Ares. You guys have done two acquisitions, large amount of fundraising and deployment activity. Can you talk about how you guys are allocating your time these days, how you see the strategic direction of the company evolving, and what would you say you're most excited about here? Gosh, it's such a simple question, but there's never a simple answer, and I find whenever somebody asks me that, it adds up to 120% or 130%, which either means I'm working too hard or it's not that straightforward. Maybe I'll quickly zoom out and tell you what I'm excited about, which is everything. At the risk of sounding cheeky, we're just in such a unique moment in time for our industry and our company. Were you to sit in on some of our strategy meetings and board meetings or employee town halls, we spend a lot of time talking about Ares as a growth company in a growth industry. Who would've thought if we said that 20 years ago, people would've looked at us funny. When you look at what the industry is doing and what we're doing within it in terms of our 20%+ growth rate, and as you pointed out, strategic expansion, both organic and inorganic, thinking as a growth company in terms of where to take the business and how to make sure that we're managing the people and the culture and the systems and the processes is just a lot of fun. I can't say that there's any one part of the job now that is more exciting than the other. There's just so much opportunity ahead of us. In terms of how I spend my time, it's always a good question because it's important that my calendar reflects my priorities, and not the other way around. Probably spend 50% of my time generally on what I would call corporate strategy. That's everything from some of the M&A that you referenced to thinking about new product development or new distribution. Really think about where the company's going, where the industry's going, and how we participate. Fortunately, I still get to spend a decent amount of my time on investment committees. That's where a lot of my passion is and where my roots are. I probably spend 15-ish% of my time on the investment side of the business, sitting on various investment committees and working with the teams through the investment process. Probably spend 15% of my time or so generally, we always say managing the day-to-day of the business with Mike and the extraordinary management team that we have here, and that's just the day-to-day things that pop up. The other large bucket is really just spending time with our large investors both public and private, and making sure that there's connectivity at the top of the house, around making sure that we're meeting the needs of our investors in terms of the delivery of returns and the client experience, and that takes up a fair amount of my time as well. I think that added up to 100. In COVID, I think days expanded, so I could probably come up with other buckets, in terms of housework and cooking dinner and things that have found their way into my day. That's a general view. Great. Mike McFerran, would you want to add anything else there? No, mine's not dissimilar from Mike's. I'm going to avoid housework while we're on this. I want you to see that. I've become quite capable. Look, I think, I would echo Mike's view on excitement between all of our organic avenues of growth and all the exciting things happening around our firm, the transactions we've done recently, the excitement of working with new partners and the fun we're having doing that. It's just really a great time. To really complement Mike, we're starting to get back in the office more. It's constantly also feeling the adrenaline boost of seeing each other more often and, a little less Zoom, a little more face-to-face, which has been great. On time allocation, not different from Mike. A lot of it's day-to-day running the business and working with my deep talented group, the non-investment side across our functions of all the things we have going on day-to-day of our current portfolios and funds and capital raising and working to integrate new businesses. Again, we have a wide, deep team and we're having a lot of fun doing it. Great. Why don't we dig into some of your recent acquisitions, starting with Black Creek, which is a private real estate manager. Yet you guys already have a real estate business. Can you talk about what's unique and differentiated about Black Creek, how it complements your existing platform, and how you can enhance each other's growth prospects? Sure. We are very excited about the Black Creek acquisition and to Mike's point, bringing on new capabilities and working with new partners. You've heard us, Mike, before just talk about how important it is that when we're making acquisitions that we get the cultural fit right because if we can't get the culture right, then obviously we can't drive the type of synergy-and- growth opportunity that we see. I think the good news is deep alignment with the partnership team there, shared vision for what the business could be in partnership, and just excited about what the future holds. I'll say at a high level, and we haven't made a secret about it, we have a strategic imperative to grow our real estate business. That's an indication of a couple things. One, it is probably our largest global addressable market. Two, it probably has the most fragmented competition, three, while we have a best-in-class team, and if you look at our publicly disclosed track record, you'll see that the investment performance has been exceptional there. It's still small relative to some of our other businesses. What we've learned over our 25 years building this company, size is actually a big competitive advantage as you think about aggregating capital and attracting and retaining talent and building out product. There has been an imperative to grow real estate. I'd say first and foremost, with Black Creek comes $12 billion of AUM which now would bulk up our global real estate franchise to $30 billion with multiple growth avenues and positions it now as one of the market leaders in the space, which we think is going to be important for our long-term sustainable growth. In terms of Black Creek specifically, there are a couple things it's bringing. One, they have a core expertise in industrial real estate. While we have had a great track record investing in the industrial landscape, it has not been to the same extent or with the same focus that our colleagues at Black Creek have. Over the last number of years, they've probably been one of the top three developers of industrial real estate in the country. Importantly, they have a vertically integrated approach to the development and management of those assets, which is slightly different from the way that we've positioned. They're bringing deep domain expertise, but also a level of vertical integration and a set of capabilities that we don't currently have. Part and parcel with that, because of the focus on industrial and the way that they do the business, most of the funds that Black Creek manages are skewed towards what we would call the core and core plus part of the market. Longer duration, lower risk-adjusted return product than what we have done historically at Ares, which tends to skew more towards the opportunistic and value add side of the spectrum, both in our equity business and our credit business. When you bring the two businesses together, very complementary, very little overlap, but now allows us to have the full product set from opportunistic all the way through core, which we think makes us more impactful in the market, but also gives us just much broader product to be relevant to our investors. Because of the core and core plus nature of what they do, a lot of what they manage are open-ended funds or non-traded REIT product, which obviously projects us as permanent capital. Because of the duration of those assets and the way that capital forms there, not only is it coming with the opportunity to broaden the product set, but it's coming with differentiated capital, particularly around the non-traded REIT sector. If you look at Black Creek, of their AUM, a little over $5 billion is in the non-traded REIT space. In 2020, they were actually the second most active raiser of capital in that non-traded REIT channel. Into 2021, they're probably number two or number three. We see great opportunity to leverage those core products to keep growing the core REIT franchise, because we've talked about on prior conversations, as we see a retailization of alternatives, the ability to leverage their capital markets and distribution expertise, which is built around a 70-plus person broker-dealer, should allow us over time to sell existing product more aggressively into the retail space, but also to take what we do now and develop products specifically for that channel. It's really interesting. There's a great real estate synergy and complementarity, but then there's also a very significant distribution opportunity that we see in joining forces. Earlier this year, you also announced the acquisition of Landmark, which is a secondary private equity firm. What's so interesting about that part of the marketplace, and it makes sense to add to your platform, and how do you think about extending their capabilities into credit? Sure. It's a good question. Again, we are fortunate that we knew the partners of Landmark for a long time, had high conviction on the cultural fit and the complementary nature of our investment approach. The reason we're so interested in secondaries. It speaks maybe a little bit to the filter that we apply to the M&A landscape. Secondaries, in our opinion, is going through a moment of transformational growth. If you look at the market historically, up until about five years ago it was characterized predominantly by LP-led transactions, meaning limited partners looking for liquidity solutions for their private equity holdings. It was predominantly private equity oriented, so about 90% plus of volume in that market was around private equity fund investments. It was predominantly a North American business. Over the last five years, what you begin to see is a shift to other parts of the private market. Not surprisingly, as private real estate capital formation has increased infra and credit, the opportunity to bring secondary solutions into that market is following. We believe that the breadth of that market speaks to the diversity of our capability, and we should be able to capitalize on the growth. Two is the globalization. We're beginning to see volumes increase outside of the North American region into Europe, and we hope soon to be Asia. As we've talked about, as we're globalizing our business, we think that we can help our partners at Landmark globalize. Third, and probably most important, is there's been a very significant shift in the market away from LP-led liquidity solutions to GP-led liquidity solutions. What that means is rather than the LP looking for liquidity in the secondary market for a fund investment, it is a GP looking for some kind of a bespoke liquidity solution within its portfolio or within the GP itself. That can take the form of continuation funds, fund restructurings, fund extensions, NAV loans, single asset or multiple asset direct secondaries. When you think about what is required to succeed in this new landscape where GP-led is outpacing the growth of LP-led, it's scale of capital. It's one of the reasons why we were attracted to the Landmark platform, because it brings immediate scale of capital. Two is relationship network and sourcing. If you look at the combined business, Landmark has 600 LP relationships. We have over 1,200. Combined, that sets us up well to continue to participate in the LP-led part of the market. What Ares brings to the table that's unique is we have one of the most developed calling efforts on the private equity real asset GP community. While up until this point, we have been leveraging those relationships with financing product, it's a pretty logical step to be able to offer secondary solutions and liquidity into those relationships as well. When you think about this market, just to give you a perspective on the growth opportunity today, if you looked at the installed base of capital in the private markets primary, secondary capital represents only 5% of the installed base. As this market continues to evolve and expand, we just see a tremendous amount of white space to grow into with our new partners at Landmark. Great. Why don't we shift gears and talk a little bit about some of your initiatives over in Asia. Last year, you acquired a majority stake in SSG. That's a private credit firm in Asia. Can you talk about how the integration is progressing and touch upon some of the initiatives that you have in place there, particularly around extending into other asset classes, bringing private equity and real estate over to Asia? It's a great question, I think as we've talked about with you and with others, we really see the long-term growth opportunity for alternative managers in Asia as one of the next big markets to open up. That's a function of where the private equity community is now, changing bank behavior, the development of capital markets, and so on and so forth. What SSG has that is unique is, one, again, cultural alignment in terms of how they think about investing and how they think about business building, two, deep institutional relationships and deep institutional track record. They came to us with almost a 15-year history of success investing across the region in developed Asia and developing Asia. Their core focus historically had been on distressed, opportunistic, and special situation investing. That continues to be the core capability of that franchise, but we've already begun to see it diversify into more traditional direct lending, and the platform is in the market with a fairly sizable direct lending fund as we speak. We're going to look, as you mentioned, to build off of the platform that they've built across the region to both expand our credit product set in places like Australia and New Zealand, where the market is more developed and more akin to what we're used to seeing in the U.S. and Europe behind the sponsor community, and unpacking their long track record investing in the real estate and infrastructure markets through their credit funds to begin to expand into other parts of the opportunity set. Integration has gone extremely well. They're fully integrated. The teams are working well together, fully collaborating. Investment performance is exactly what we hoped it would be, if not better. Fund growth in terms of core funds is tracking to what we expected. Now we're in that phase where we're picking our head up and starting to launch new products and open up new markets. We're a little over a year in, but so far so good. Great. Moving on to a different topic, interest rates, one that frequently comes up in conversations with investors these days. Can you just help us understand some of the moving pieces around how higher interest rates could impact your portfolio and also the P&L? Any sort of thoughts around what level of interest rates could begin to have an impact on fundraising for credit, or maybe IG or high yield become a bit more competitive? Yeah. There's a lot of different ways to approach that. Maybe let me start with the last part of the question, because I think it's important for people to hear it as they think about the durability of our strategies. 20 years ago, when this industry was still in its infancy, most people were looking to alternatives for some kind of absolute return outcome. While it was deemed alternative, it was never really clear what it was an alternative to other than it was a place where people were trying to make very high risk-adjusted return and very high multiple invested capital. That was true in private equity, venture, and real estate, but it was also true in the early iterations of private credit. Where our first private credit funds were mezzanine-oriented, looking to make mid-teens type rates of return. The reason I'm going back in time is if you look at what alternatives means today, particularly alternative credit, most of our large institutional investors are not looking to us to generate an absolute return or a specific investment outcome per se. What they're really looking at is saying, can I generate excess return in the private markets relative to the public market equivalent? That public market equivalent, depending on the investor, may be the syndicated loan or the high-yield bond market. It may be the securitization market. It may be the CMBS, RMBS market and so on and so forth. Depending on where the investor lies from a cost of capital or regulatory framework standpoint, that's what they're most focused on. People should understand that alternative credit today is a net spread business. Our cost of capital generally reflects the conditions in the liquid market, but our asset spreads don't. What that means is that even as interest rates expand or contract, as long as there's a persistent excess premium that's getting created by our sourcing or structuring or creativity, complexity, relationship, illiquidity, that's what they're trying to capture. When rates move, as long as our excess return is moving with rates, we would not expect to see any changed investor behavior. I think we've now seen enough volatility in rates as this market has matured and globalized to have high conviction on that. In terms of the positioning of the portfolio, I think the nice thing about the business is if you look at our $227 billion of AUM, $150-plus billion of it is in the private credit markets. The bulk of our private credit assets tend to be shorter duration floating rate assets. To the extent that we are leveraging them to drive levered ROE, we're leveraging them with match duration, match-funded floating rate liabilities. In the case of some of our larger entities like our publicly traded BDC, Ares Capital Corporation, we're leveraging them with very long-dated lower cost of capital fixed rate liabilities. If you just think of $230 billion of AUM with a significant majority of those assets in the private credit markets, as rates go up, particularly given some of the liability structures that we have in place, that would be a very big boon to the performance of those portfolios. If you say, why are rates going up? If rates are going up for the right reasons, we have generally seen that that means that we're in an environment that is benign, if not constructive for underlying credit performance. The setup for us is actually pretty good. That being said, we've demonstrated, we hope, over our almost 30 years of investing, the ability to navigate short-term moves in rates. Obviously, we've already shown that we can do that. If you look at where LIBOR is today at 12 basis points relative to its historical average pre-GFC of over three, we've already demonstrated that these assets, given our sourcing and structuring, will perform regardless of the rate backdrop. Maybe quickly moving on to some of our other businesses. A lot of our real asset portfolios are inflation hedges, if you will, offer us an opportunity to see values move as a hedge. The place where you're probably most vulnerable would be in some of our core buyout strategies where we're using leverage to help support returns. Obviously you would see some modest reduction in profitability. I think importantly, if you were to go back and look at how Ares generates private equity returns through cycles, 80%-plus of our value creation comes from growing cash flow and not from financial engineering or the use of excessive leverage. Any increased cost burden, if you will, from rates going up, I believe would be more than offset by the fundamental growth that we're going to be seeing in those companies. Mike McFerran, you wanted two seconds on impact to the P&L? Look, from the firm's P&L, I think you hit it, Mike. The portfolio is primarily floating rate to the extent that it's got yield exposure. You expect appreciation there and higher income. Our balance sheet, and again, we're a balance sheet light business, so it doesn't have a material effect on us. We're obviously on a higher rate, and all of our debt's locked in a fixed rate. I think initially to hop and just touch on something you already said, state the obvious is, if you experience an accelerated increase in rates, which I don't think any of us are expecting, as Mike touched on by historical standards. If you saw rates starting to walk up to something pre-GFC, that's almost returning to a bit of historical normalcy, which I don't think is likely, but if it did, that's probably the most plausible scenario of a higher rate increase. If you did see short-term spikes, then interest in market volatility, which as we've always said, is healthy for us. Great. We have about five minutes left. I'd love it if we could hit on maybe two more topics quickly. Maybe just first two minutes, maybe if you can quickly just on deployment, you have about $57 billion of dry powder today in the current environment. Where are you seeing the most attractive opportunities to put capital to work, and what areas are you guys avoiding? Yeah, there are very few areas we're avoiding. This is one of those nice markets where you've got the global recovery taking root, good liquidity in the market, so transaction volumes are up plenty to choose from. Generally speaking, across all of our strategies, we're closing less than 5% of the deals that come across the transom. So, with the markets healthy, we're seeing more, and able to find plenty of attractive things to invest in, and that's pretty much across the board. That $57 billion number that you mentioned, we've historically said that when you look at our dry powder, we'd like to see it get deployed somewhere between 18 and 36 months. Just to put that in perspective and kind of corroborate against where we are now, Q4 of 2020, which was a little bit of a recovery quarter towards the end of the pandemic, particularly in the U.S., we deployed about $7.3 billion in our drawdown funds. Q1, which is a seasonally slow quarter typically, actually came in at about $9 billion. As we've talked about on both the Ares Management earnings calls and the ARCC calls, deployment continues to keep apace with that as far as we can tell. If you look at $57 billion, and you said, generally speaking, you'd love to see it get invested in two years, we're clearly at or ahead of that pace given the activity levels that we witnessed in Q4 and Q1. Great. Maybe just final question here. Can't get away without one on the margin. FRE margin, you guys have made some significant improvement on the FRE margin. Earlier this year, you said you could hit a 40% run rate by 2023 or earlier, and since then you've announced the acquisition of Landmark, which adds about 200 basis points to your FE margin. Would it be reasonable to assume that by the end of 2023 or earlier, you could be at a 42% run rate? How should we be thinking about the moving pieces there? Mike, you said it appropriately. We said 2023 or earlier. I'd highlight the word earlier. I think we've shown consistent margin expansion. If you look at us from 2017 to 2020, our margin expanded on average almost 250 basis points a year. From 2019 to 2020, it expanded almost 500 basis points. As we've indicated, I think rather consistently in public forums, we don't see any limiters on margin expansion, and it's really a function of putting the dry powder to work and as Mike talked about, the deployment that's coming online, obviously at a much higher margin than the business operates at. You mentioned Landmark, which we've shown is going to be accretive to margin. Yeah, I don't see anything. We haven't revised guidance yet, but your math is right, and we continue to see nice margin expansion. What's most important to us is to grow the business, grow the business smartly, and invest for growth, and we're doing that, and we're able to do that with margin expansion as we go. Great. Well, I'm afraid we'll have to leave it there. We're out of time. Mike McFerran, Michael Arougheti, thank you so much for joining us today. Appreciate your time and your insights. Thanks, Mike. Always enjoy talking to you. Appreciate it. Okay, Mike. Take care.