ARES - NYSE

Welcome to Ares Management Corporation's Fourth Quarter and Year-End 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Thursday, February 5, 2026. I will now turn the call over to Greg Mason, Co-Head of Public Markets Investor Relations for Ares Management.

Good morning, and thank you for joining us today for our fourth quarter and year-end 2025 conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. We also have other executives with us today who will be available during Q&A. 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, and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in Ares or any Ares Fund. 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. Please refer to our fourth quarter earnings presentation available on the Investor Resources section of our website for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. Note that we plan to file our Form 10-K later this month. This morning, we announced that we declared a 20% year-over-year increase in our first quarter 2026 common dividend of $1.35 per share on the company's Class A and nonvoting common stock. The dividend will be paid on March 31, 2026, to shareholders of record on March 17. Jarrod will provide additional color on the drivers of this increase later in the call. Now I'll turn the call over to Mike, who will start with some fourth quarter and year-end business highlights and our outlook for 2026.

Thank you, Greg, and good morning, everybody. I hope you're doing well. Our strong fourth quarter cemented another record year for Ares. We reached several important milestones and made significant progress on our strategic initiatives by expanding our investment platform and geographic reach. We crossed $600 billion in AUM, and we exceeded $100 billion in both our 2025 fundraising and investing activities. Our record $113 billion in total fundraising for the year was capped off by a record $36 billion in the fourth quarter. It's noteworthy that we surpassed our previous record by such a wide margin without our 2 largest private credit campaign funds in the market. This success, along with the closing of our GCP acquisition in March resulted in AUM growth of 29% over the previous year to reach over $622 billion. We also saw a notable increase in our investment activity in the second half of the year following a brief market pause around the April tariff announcements. Fourth quarter deployment was a record $46 billion. And for the full year, gross deployment totaled $146 billion, an increase of 37% over 2024. These activities drove a 32% year-over-year increase in our FP AUM to $385 billion and new annual record and after-tax realized income per share of Class A stock, which all increased more than 20% year-over-year. And as Jarrod will discuss a little bit later, we continue to generate attractive performance across our major strategies. In our view, these results demonstrate that our continued investment in growth and diversification is taking hold and that we have significant momentum entering 2026. It was also a year of significant strategic enhancements with new products, expanded distribution efforts and gains in internal operating efficiencies. The acquisition of GCP expanded our real estate and digital infrastructure offerings and vaulted our real estate business into a global top 3 owner and operator of industrial real estate. The scale, expansion and diversification of our product suite also drove growth in our Wealth Management business to over $66 billion in AUM, up 69% year-over-year. We also made significant investments in new data systems, including over 25 AI projects across the firm focused on enhancing our investment decision process, optimizing sales efforts and increasing back-office productivity, which all should ultimately assist margin growth and productivity in the years to come. And in December, we were both pleased and honored to be added to the S&P 500 Index. As evidenced by our strong fund performance, our investment portfolios continue to exhibit solid fundamentals and our credit portfolios generated attractive return premia over the traded market equivalents. Within credit, productivity improvements in portfolio companies are translating into solid revenue and EBITDA growth. Loan-to-value ratios are near historical lows in the 40% range. Interest coverage continues to strengthen and quarter-to-quarter nonaccruing loan trends are generally flat, while remaining well below historical average levels. As an example, in our U.S. direct lending strategy, portfolio company EBITDA growth was in the low double digits for the last 12 months, and net realized loss rates were essentially 0 on a net basis, which is in line with our 20-year average of 1 basis point in annual losses. Across real assets, valuations are steady to improving. Rent growth is constructive, market transaction activity is returning and demands for digital infrastructure are driving both data center and energy infrastructure investment opportunities. Secondaries are benefiting from a strong economic backdrop and positive fundamentals across their underlying asset classes. And within private equity, organic portfolio company EBITDA growth was 13% for the last 12 months in our latest PE fund, ACOF V. Over the past several years, we've invested in scaling our global origination and investment capabilities across credit, real assets and secondaries. In 2025, our investments paid off as our investment activity accelerated and broadened across products and geographic regions. We saw real asset deployment more than double from approximately $10 billion in 2024 to over $23 billion in 2025. And Deployment across all credit increased 29% and a rebound in the liquid markets, along with stronger inflows drove a 46% increase in our liquid credit deployment. After a slower first half, our U.S. and European direct lending deployment also increased sharply year-over-year with investments into more than 240 different portfolio companies. And together, these 2 strategies represented just over half of our deployment for the year. Looking ahead, we're optimistic that the improving transaction environment from the second half of last year will segue into increased activity in 2026. We continue to see significant pent-up demand particularly as private equity sponsors seek liquidity solutions for mature portfolios. This is supported by a large inventory of seasoned assets open financial markets, an improving interest rate environment, greater business confidence and gradually narrowing bid-ask spreads. Our private equity business is positioned to take advantage of a meaningful pipeline of new investments and potential realizations. As these dynamics evolve, our origination capacity plus greater market transaction volumes should lead to further growth in our deployment in 2026, barring any unforeseen global market disruptions. And while we would normally expect lower seasonal volume in the first quarter as January and February are typically slower, our aggregate investment pipeline across the firm measured in mid-January increased from a quarter ago and now stands at a record level. As we look to 2026 and beyond, we're confident that our business is well positioned for future opportunities. We operate in vast addressable and growing markets that spend tens of trillions of dollars globally. And while we're among the largest alternative managers, we continue to view our business as being in the early stages of global expansion. Visibility into our future growth is high as we've already raised $100 billion of AUM that will earn fees once it's invested. Institutional and individual investor demand continues to be broad and persistent, attractive private market returns and underweighted allocations continue to drive additional inflows from both institutional and individual investors. Supporting this, a November market survey highlighted that approximately 90% of institutional investors plan to add or maintain private credit allocations over the longer term. We also continue to see strong demand from individual investors. Despite over $300 billion in private market gross inflows from the wealth channel over the past 3 years, the average allocation to private markets for individual investors remains unchanged at approximately 3% to 4% and primarily due to rising overall market values. As a result, we believe that there are meaningful opportunities for private market allocations in the wealth channel to move towards the much higher allocations that we see among institutional investors. Turning to our fundraising institutional channel led the way as it continues to account for the majority of our fundraising. Starting with the credit group. We raised over $18 billion in the fourth quarter across all our channels with U.S. and European direct lending strategies accounting for over $12 billion. With an opportunistic credit, our third fund raised an additional $1.2 billion in the fourth quarter bringing total commitments to just under $7 billion at year-end. We anticipate a final close for the fund at the end of the first quarter at a level over the $7.1 billion that we raised in the previous vintage. Our liquid credit strategy raised over $3 billion in equity commitments in Q4 through several sizable new SMA mandates. In January, we launched our third closed-end commingled alternative credit fund. Given the strong initial demand, we anticipate completing the full fund raise by the end of the summer, if not sooner, at a similar level to the previous vintage of $6.6 billion. As a reminder, before launching the new fund, investors in the second vintage were offered the election to extend the investment period of the fund for 2 additional years. Approximately half of the LP base, representing $3.5 billion of commitments, in fact, elected to a spend. And with the previous fund extension, if the fundraise meets the previous vintages size, Ares will have over $10 billion of incremental investment capacity in the strategy and manage 4 of the 5 largest institutional ABF funds. For the full year, we raised more than $65 billion across our 6 strategies within the credit group. And as these results demonstrate, demand for our credit products remain robust. Going forward, we expect to launch our fourth U.S. senior direct lending fund later this year and our seventh European direct lending fund in early 2027, representing our 2 largest closed-end co-mingled funds. The timing and sizing will depend on deployment pace and other fundraising activities, but for our U.S. fund, we anticipate a potential first close in the fourth quarter. The fourth quarter capped a very strong year for our real estate group, where we raised more than $16 billion for the year, including over $7 billion in the fourth quarter. Highlights in the quarter include $4 billion raised in our real estate debt strategy and an additional $1.3 billion in our 11th U.S. value-add fund, bringing total commitments to $2.3 billion. We're already above our $2 billion target, and we anticipate hitting the fund's hard cap of $3.1 billion in the first half of 2026. Going forward, we have a strong lineup with our fifth Japan Industrial Development Fund, the return of our fifth U.S. opportunistic fund our second self-storage fund and new European real estate products, along with additional flows from our perpetual institutional and wealth products. In infrastructure, during the fourth quarter, we raised approximately $3 billion across our sixth infrastructure debt fund, certain SMAs and our open-end core infrastructure fund. This concluded a strong year where we raised more than $7 billion and we expect 2026 will be even better. Notably, inclusive of flows since year-end, our open-end core infrastructure fund now stands at over $2.5 billion of assets. Following closing of our inaugural $2.4 billion data center fundraise in 2025, we expect to raise significant additional capital around our digital infrastructure equity strategy in 2026, which has distinctive advantages due to our vertically integrated model and our significant global pipeline of seed assets, which include cloud and AI data center projects already underway. Our digital infrastructure team and pipeline continue to grow as we source opportunities to execute through data infrastructure, our in-house data center development and operations team. Although data center exposure is a relatively small component of our current AUM at just under 2%, we expect digital infrastructure to be a key contributor to our business in 2026 and beyond. In our secondaries group, we held a final close for our inaugural credit secondaries fund, raising nearly $1 billion in the fourth quarter, bringing total equity commitments to $4 billion. This is a remarkable achievement for a first-time fund. The largest inaugural institutional fundraise for Ares. Including anticipated leverage in related vehicles to a strategy now exceeds $7 billion. We believe that our team is well positioned as a secondary market with substantial capital and differentiated knowledge and experience in the asset class. Our PE secondaries team raised over $1.8 billion in equity commitments across our new GP-led secondaries products, and our wealth product. And in December, we launched our tenth real estate secondaries fund and anticipate new commitments throughout 2026. For the full year, our Secondaries Group was a standout performer with $12.9 billion raised and an increase in AUM of 45%. We ended the year with our secondaries business having nearly doubled in size since we acquired Landmark in mid-2021. In the wealth channel with equity flows into our semi-liquid wealth products totaling $16 billion and net flows of $1 billion which drove our AUM in our semi-liquid wealth products to $66 billion at year-end. Third-party sources indicate that we gained market share for the year including within the direct lending and real estate sectors, which positions us as within the top tier of alternative managers in the wealth sector. The fourth quarter was our second best quarter ever with $4.1 billion raised across our 8 products with positive net inflows across all 8 semi-liquid solutions totaling $3 billion. Performance across our funds continues to be a meaningful differentiator with strong performance across direct lending, private equity secondaries and our real estate products, as Jarrod will highlight further. We've specifically designed our wealth products to combine the best of what Ares offers with the evolving client needs for durable income, diversified equity growth and tax advantage real assets exposure. The result is that we're seeing strong demand across each of our 8 semi-liquid strategies and we now have AUM exceeding $2 billion in 7 of our 8 strategies. Our near-term focus is to complement our existing flagship products by extending these strategies with new distribution channels, geographic regions and expanding products with our existing 80 distribution partner platforms. In the retirement sector, we introduced our U.S. direct lending credit product to the 401(k) market last month, and we expect to add more plan sponsors in the future. As we look to Total equity inflows in January were approximately $1.2 billion, and we expect to raise a similar amount in February. Based on industry dynamics, along with our product breadth and differentiation, performance leadership and platform scale, we expect our equity inflows for this year to meet or exceed our prior year levels. Our third distribution channel in insurance is also expanding through our dedicated insurance solutions group. Our insurance AUM growth accelerated with strong flows from Aspida and third-party insurance clients. At Aspida, sales volumes totaled $8.8 billion for the year, a 39% increase over 2024, and we continue to see interest from third-party insurance companies as total insurance-related AUM increased 20% and year-over-year to $86 billion. Going forward, we expect to further broaden our private investment grade origination capability [indiscernible] with a private investment grade business embedded within our alternative credit strategy, which manages approximately $25 billion across private IG solutions. Notably, our private IG strategy within ABF generated a return premium of approximately 200 basis points over IG corporate bonds last year. We plan to expand our private IG capabilities beyond asset-backed investing into corporate direct lending infrastructure debt and real estate debt through our expansive direct origination platform. We'd expect to raise more third-party insurance capital around these expansion efforts across our credit strategies over time. When we include the significant product lineup that we have on the institutional side, including the launch of 2 of our largest credit funds, along with the momentum of our wealth and insurance platforms, we expect the strength in our fundraising to continue into 2026. At this point, we expect our total fundraising for 2026 to be as good or better than our record year in 2025. And now I'm going to turn the call over to Jarrod for his comments on our financial results and outlook. Jarrod?

Thanks, Mike. We continue to build on our strong momentum in the year-end, extending the financial records we set in prior years across management fees, FRE, realized income and after-tax RI per share. each of which exhibited strong year-over-year growth. We were also able to generate a meaningful year-over-year increase in FRE margins in the fourth quarter and a modest increase for the full year even with the margin headwinds from the GCP acquisition. We entered 2026 with a high level of optimism about the continued success and growth of our business. We're seeing improved conditions for future deployment across a broader range of investment strategies than we have in several years, and we're well prepared to invest with substantial dry powder of $156 billion. . This year, we're raising our largest funds in alternative credit and U.S. direct lending and anticipate strong demand from institutional investors. The GCP acquisition integration is going well and in 2026, we expect to see more expense savings and revenue enhancements. And finally, 2026 is expected to be our most significant year yet for the realization of some of our European style performance fees, which have been accruing for a number of years and we have a meaningful opportunity for significant growth in our FRPR due to the growth in underlying fee eligible AUM and the rebound in the real estate market, which we expect to continue. Turning to our quarterly results. management fees were a record $994 million in the fourth quarter and totaled $3.7 billion for the full year. Management fees grew 27% and 25% on a quarterly and full year basis versus comparable periods driven by strong growth in our FPAUM. Fourth quarter fee-related performance revenues totaled $171 million and 4% versus the prior period as we saw increased contributions from secondary products as well as a contribution from our diversified nontraded REIT for the first time since 2022. As I mentioned, there is the potential for significant growth in FRP and from both of our nontrade and REITs, assuming a continued recovery in the real estate market. The diversified REIT has now surpassed its high watermark, and our industrial non-traded REIT is within 2.5%. To put this in perspective, if our nontraded REITs had not faced the high watermark in 2025, the 2 REITs would have recognized $79 million in gross FRP for the year based on their respective returns. Fee-related earnings for the full year increased 30% over the prior period and accelerated to 33% year-over-year growth in the fourth quarter to a record $528 million. Full year FRE margins came in at 41.7%, ahead of 2024s FRE margin of 41.5%, which was in line with our guidance from last quarter's call. Heading into 2026, we have good visibility into improving margin contributions from continuing back-office efficiencies. [indiscernible] from the GCP integration, the data center business slipping from a negative FRE business to a positive FRE contributor and our expectations for continued strong growth in AUM and fee-paying AUM. As a result, we expect the 2026 FRE margin to come in at the high end of our annual target range of 0 to 150 basis points. Our realization activity increased in the fourth quarter, with net realized performance income totaling $102 million. For the first quarter, we expect to realize $52 million this upcoming week and have visibility of approximately $50 million of additional net realized performance income from our European style funds. Therefore, we're on track with the guidance we gave on our Q3 call about generating $200 million in realized net performance income over Q4 and Q1 of 2026. For the full year of 2026, we continue to expect our European style net realized performance income will total approximately $350 million, which would more than double 2025 levels. For the full year, we realized a record $169 million in net performance income. Even with the record realizations during the year, our net accrued performance income on an unconsolidated basis, rose by approximately $102 million or 10% to $1.1 billion at year-end with approximately $984 million or 89% in European style funds. As Mike mentioned earlier, the private equity transaction backdrop is improving. So we believe there's the potential for us to realize a modest portion of our $123 million net accrued carry balance in our American style funds most likely in the second half of 2026. Realized income for the fourth quarter totaled a record $589 million. And for the full year, it exceeded $1.8 billion, a 26% increase from 2024. For the full year 2025 [indiscernible] income was 10.3% and rose to 13.5% in the fourth quarter. Our tax rate was higher in the fourth quarter due to a greater amount of net realized performance income, which generally has less deductions and therefore, results in a higher effective rate. For 2026, we anticipate an effective tax rate on our realized income to be in the range of 11% to 15%. As you can see from the earnings presentation, our funds and assorted Composites continue to perform very well. For the full year, we experienced double-digit returns in our U.S. direct lending, alternative credit, opportunistic credit and APAC credit strategies. As Mike stated, Credit quality underlying our U.S. and European direct lending portfolios remain strong and stable. In our U.S. direct lending portfolios, our company has generated year-over-year EBITDA growth of 10% and interest coverage improved to 2.2x. Our nontraded BDC had 0 nonaccruals across its nearly 900 portfolio companies with stable dividends throughout the year and a 9.3% net return. As of November 2025, our nontraded BDC was the #1 performer measured by comparing the 1-year return of Class I shares reported in SEC filings among the 5 largest nontraded BDC peers as identified by [ Stanger's ] AUM data. Our public BDC, Ares Capital also reported strong credit metrics, with nonaccruing loan ratio of 1.8% at cost and 1.2% at fair value, which was unchanged from the level a year ago, and this ratio remains well below its long-term average in the industry group average. Ares Capital generated a 10.3% fund level return on its NAV for 2025. Ares Capital has generated an average annual total stock return over its 21-year history of 12.4%, which is double the average annual return of the broadly syndicated bank loan index and nearly double the high-yield index over that same period. In real estate, the recovery of many asset class value is clearly underway, and we're seeing strong performance across our funds. Notably, our diversified nontraded REIT generated an 11.6% total net return in 2025. As of November 2025, our diversified nontraded REIT was also the #1 performer among our 5 largest nontraded REIT peers as measured by the 1-year return of Class I shares reported in SEC filings and Sanger's AUM data. And our industrial non-traded REIT remains the #1 performing nontraded REIT over the past 5 years using the same metrics in peer-set. In infrastructure, our open-ended board infrastructure fund generated 9.9% net returns for the year. In private equity secondaries, our semi-liquid wealth vehicle generated a 13.4% net return for the year. And with the private equity, our most recent vintage fund, ACOF VI, remains a top quartile fund in its vintage and has generated a gross IRR since inception of over 21% with a net return in 2025 of 16%. Finally, as Greg stated earlier, we've elected to increase our first quarter dividend up to $135, up 20% from last year. This increase reflects our continued confidence in hitting our target of 20% plus for realized income in 2026, which is supported by strong growth fundamentals in our management fees and fee-related earnings and enhanced by accelerated growth in our net realized performance income in our European style funds. I'll now turn the call back over to Mike for his concluding remarks.

Thanks, JarrodJared. Before wrapping up our prepared comments, I would love to address questions that we're getting about our software exposure given the recent market volatility. Across our firm, we have a highly diversified portfolio of investments in software companies which are nearly all senior secured loans and represent about 6% of our total and less than 9% of what we consider private credit AUM, inclusive of real asset lending, but excluding liquid credit. Importantly, not all software exposure is the same since private equities in the first loss position and most of our senior loans are compounding cash returns in the 10% range and our short duration typically 3 to 4 years of remaining maturity. The traded equity and debt market indices and software reinforce this point, with the public equity software index down roughly 20% year-to-date versus only 2.3% for the software index in the broadly syndicated loan market. Our software portfolio is highly diversified across many subsectors with a very small percentage of the portfolio that we deem to have high risk of AI disruption. We lend at lower loans to value on software, which are in the high 30% range compared to mid-40s LTV on the rest of the portfolio. Our software portfolio companies generate significant cash flow with EBITDA margins over 40%, average EBITDA over $350 million and a growth rate that is faster than the overall credit portfolio over the past year. We don't focus on ARR loans, which represent less than 1% of our global direct lending portfolio and nonaccruals in software are close to 0. As a balance sheet light manager, we have negligible look-through exposure to soft grow in our balance sheet and any potential credit losses would also have a limit impact on management fees and earnings. In fact, any time there's a material disruption in any industry, there's always 2 sides of the coin. Our opportunistic credit and seconders business should see more investment opportunities, which provides a natural hedge, and an acceleration in AI adoption should actually be a meaningful contributor to management fee and earnings growth overall for Ares as our digital infrastructure business would generate meaningful AUM, management fees and FRE growth. As a result, we see no change to our earnings growth outlook from AI risks in our existing portfolio and our business can naturally adapt to the risks and opportunities as they're presented. So in our view, we entered 2026 in a position of strength with strong underlying performance across the portfolio and improving capital markets and M&A backdrop, a large and expanding footprint of origination capabilities across asset classes and geographies and a significant amount of dry powder to take advantage of the many investment opportunities that we're evaluating in the market. As Jarrod mentioned, we have a number of earnings tailwinds, including our significant AUM not yet paying fees, our prospects for margin improvement, revenue and expense synergies from the GCP integration and our potential growth in performance income and FRPR. We believe our business is well prepared to navigate any challenges arising in the markets, including AI software-related risks. And while we have seen some credit dispersion among the peer group, we're seeing strong fundamentals across our credit portfolios. As I stated earlier, the fundamentals are actually improving with loan-to-value ratios and nonaccruals near historic lows leverage multiples declining, interest coverage multiples increasing and growth intact. We have large and experienced teams across each of our businesses, and within our credit group, we believe that we possess the largest portfolio monitoring and restructuring teams in the industry. As you've heard me emphasize before, our balance sheet-light management fee-centric business model insulates the impact from credit losses to our earnings and our ample dry powder allows us to invest opportunistically during periods of market dislocation and grow at a time when many capital markets participants are forced to pull back. I'm so proud and grateful for the hard work and dedication of our employees around the globe, delivering yet another year of record results. And I'm also deeply appreciative of our investors' continuing support for our company. And with that, operator, could you please open line for questions.

[Operator Instructions] Our first question comes from Craig Siegenthaler with Bank of America.

I wanted to start where you left off on the software AI disruption theme, and I really appreciate the additional commentary at the end of the call. But if you look over the last like 5 years or so, software was a large source of credit origination for the industry. And we've seen a transition to data centers and power really the picks and shovels around AI which is benefiting other parts of your business. But as you take a step back, how do you see your overall deployment effort impacting from a lack of potential business from the software industry in the future, but the shift to areas like data centers and power, which fuel the growth of AI.

Yes. Thanks, Greg. I appreciate the question. And again, I -- hopefully, the prepared remarks gave some color, but I also think my partner court did a great job on the ARCC call yesterday, just articulating the approach that we have to software investing and, frankly, investing in general. Obviously, we've been doing this for 30 years. And 1 would expect, but maybe not that the first question 1 would ask when investing in software is, do I have technology or obsolescence risk. So it would be pretty unlikely that someone who is investing in software has not been underwriting with a primary view as to whether or not there's a risk of disruption. So again, we feel very, very confident that we have our arms around our existing exposures. We feel very confident that the types of software businesses that we've invested in have meaningful characteristics that will protect them and if not create opportunity companies that are part of foundational infrastructure they sit at the center of companies, tech stacks. They manage complex workflows. They benefit from ownership and collection of proprietary data that they've built over many years with diverse customer bases. They operate in highly regulated industries like health care and financial services. So again, I -- it's interesting to see how the markets are thinking about software companies is all being equal and not really understanding the difference between companies that could get disrupted by AI in places like digital content creation or data analytics and visualization versus like real entrenched enterprise systems. And so we'll just keep we'll just keep talking about the exposures and hope people will get it. In terms of the origination, I think the easier way to think about it, Craig, is over a 30-year period, new markets open and close. And the best way to think about what we do is we're just trying to capture our broad slice of GDP and economic growth around the world. obviously, maintaining a high degree of industry and company selectivity. So as software and health care continue to grow into meaningful contributors to GDP, not surprisingly, we and others followed with the same level of underwriting discipline that we always have had. And now that we're moving into a super cycle on infrastructure and energy, we're following there. So I don't perceive that this disruption is going to have a meaningful impact in any way on aggregate origination volumes. And as we said in the prepared remarks, our pipeline across the entirety of what we do is at record levels right now. So yes, we're feeling pretty good about it.

We'll now move on to Alex Blostein with Goldman Sachs.

I was hoping to piggy back on your comments, Mike, around what you're seeing in the wealth channel kind of real time, obviously, not the first time we're going through volatile periods. We know the retail channel tends to pull back a little bit. I think you've said that what you've seen so far resembles kind of your January flows. So I think you said $1.2 billion across the suite of products. So can you unpack that a little more between direct lending products versus other well vehicles that you guys have sort of what you're seeing for Feb -- and I guess, more importantly, just the sentiment on the ground from distributors and gatekeepers and how they view direct lending wealth products in the current backdrop?

Sure. I'll try to give you a deep answer on that. But before I do, Alex, I just want to remind folks back to how we've tried to position our fund families and capital base, right? We were frankly, a little bit slow to grow and deepen our penetration in wealth because it's a little bit more procyclical and frankly, harder to manage flows against the deployment opportunity. And so it was critically important to us that we looked at wealth. Yes, as an opportunity to open up access to the retail investors who previously couldn't get to this product. But from a fund management standpoint, it was critical that we felt that we had a real deep base of institutional drawdown capital in the form of commingled funds and SMAs that sat alongside these products to make sure that we can navigate the flows. And I think where people have tripped up as they've been, frankly, a little too dependent and over-indexed to the well flows and they've been procyclical when the money is coming in and either unable to defend or unable to capture the highest quality vintages. So we've been very, very intentional and measured about how we're thinking about the product set. How we're thinking about the pace of growth in wealth relative to our institutional client flows and making sure that if we find ourselves in a period where there are headwinds on flows and wealth that it doesn't do anything to diminish our ability to take advantage of the market. And that is actually where we sit here today. We had record flows last year, as we mentioned, about $16.5 billion of equity and close to $25 billion of total flows into wealth. That was a 61% increase year-over-year. We have seen some cyclicality in how the wealth channel is looking at different asset classes. Obviously, we saw a big ramp-up in real estate exposures 3 or 4 years ago. And then we saw some headwinds there. Some of our peers obviously saw meaningful net outflows. If you look at our experience in real estate, we actually enjoyed net inflows even through the period of dislocation in real estate. And now with some of this, in my opinion, overblown noise around private credit, you are seeing some outflows, but on a net basis, the inflows are still quite strong. and what we're hearing on the ground from advisers, and you could see this just in the investor count looking to take advantage of the liquidity opportunity, about 95% plus of all the investors are not looking for liquidity. So typically, what's driving these redemption queues are a small handful of investors that then have to continue to get back in the queue to the extent that they don't get the liquidity they need. So you do tend to see overinflated numbers coming through the redemption queue as people are trying to get to the front of the line. in January, we saw very strong flows, as you said, $1.2 billion. We're seeing similar numbers coming in line through February the demand is broad-based. We're seeing good flows in the private credit product, good flows in the core infrastructure product. and that's been a big bright spot for us in ACI as an example. We saw $750 million of inflows, I think, in January and February versus about $200 million last year. So good momentum. I think from the Ares perspective and it's important, that's why I started the answer where I did, Alex, that if we do see a modest slowdown, which we're not calling for, but if we do, it's not going to do anything to impact our ability to continue to drive FAUM and FRE through the deployment and the other products that we manage.

We'll now move on to Bill Katz with TD Cowen.

So I appreciate all the comments and also the work on the ARCC side which we listened into as well. So maybe a big picture question for you, Mike. As you think ahead, last couple of years have been defined by private credit in the retail side, and you talked about sort of the real estate cycle prior to that. When you look at the data, it does seem like that's starting to slow. I was curious your thoughts on 2 areas that we think could be a really big opportunity just given the shifting macro backdrop, real assets, specifically real estate. And then the secondary platform is just another form of liquidity. And then I think you mentioned that your flagship credit vehicles might be back in the market. I just missed the time lines of that. Could you just sort of refresh what you said? I apologize, busy morning. And how big could those be relative to the prior sizes?

Yes. So when we think about our large credit funds, our opportunistic credit fund, our third one we said has been having rolling closings. We expect to have a final close on that fund early this year, and it will be at or above the prior vintage of $7.1 billion. We also mentioned in the prepared remarks, Bill, that we have launched the third vintage of our "flagship" ABF fund path finder. We expect that, that will likely be wrapped up by the end of the summer, if not sooner, has really good momentum. And again, the expectation there would be that we would have a closing on that fund at or above the prior vintage, which was $6.6 billion. And that's on top of having extended duration on about $3.5 billion of investor capital from the prior fund. So net $10 billion effective tool of capital increase there. We are likely to be bringing our fourth U.S. direct lending flagship back to the market this year and expect that we could have a close as early as the fourth quarter of this year. And then we will be bringing our seventh European direct lending fund into the market. and would likely have a close probably early in 2027. So all of those are starting to work their way through. I think in terms of -- you highlighted real assets and secondaries, and I appreciate you doing that because I think 1 of the things that we've been very focused on here as we build our capabilities and capacity over the last 10 years has been to diversified by asset class and geography and try to identify where there's going to be breakout growth and where we can accumulate scale and talent and capital to go after it. secondary as being one place where we mentioned on the prepared remarks, we acquired Landmark 4.5 years ago. with a view that we were going to see transformational changes in secondaries that were going to be driven by a move to GP-led continued growth in primary market exposures diversification away from just PE into places like real assets and credit. And as we said, we doubled the AUM and profitability of that that business here over the last 4.5 years, and the momentum continues. Real estate as well, obviously, you've seen us making meaningful investments in vertically integrating and developing the capability set there and real estate is in a very interesting cyclical place, having seen real estate values draw down 18% to 20% that have been undersupplied where we saw construction down over the last couple of years, a constructive rate backdrop and some secular tailwinds now in certain parts of the market like logistics that have us pretty excited about the deployment and return opportunity in the real estate complex. So I want to emphasize, which I think was the point of your question, Bill, that there may be a misperception that we're kind of over reliant on private credit deployment and fundraising. And while that obviously continues to be a big part of the business, we have 19 to 20 global credit strategies that are driving deployment. And when one is turned on, sometimes others are turned off. But because of the diversity of strategy, I think you're going to see continued deployment pretty much across the platform, but I would expect to see continued break out growth in real estate and secondaries or real assets and secondaries for sure.

We'll now move on to Ken Worthington with JPMorgan.

I wanted to flesh out the comments in your prepared remarks on ABF and really the outlook for fundraising and deployment as we think about 2026. So it seems like the episodic or periodic credit quality fears that we're seeing in direct lending, back half of '20 and early '26 might be focusing more demand on alt credit and ABF. I'll break it down in 2 parts. You mentioned the $25 billion on the rated side, would you expect interest there to be improving. And as we think about Pathfinder and Pathfinder core, how is the deployment opportunities on that side of the business?

Sure. Thanks, Ken. Again, I just want to table set here. When we think about the ABF business is a huge addressable TAM globally, but people are articulating the opportunity in different ways because there is a high-grade rated ABF market, and then there is a sub-investment grade and non-rated that work hand in hand, but require, in my opinion, different skill sets, different forms of capital, different networks, et cetera. So where we have been laying groundwork building capability and capacity since we acquired Indicus 15 years ago, was to really focus on being the largest, broadest investor on the nonrated side because we felt like that's where we're going to be able to generate the highest return premia and generate the most alpha in the market. And with that capability set now very well entrenched here, we've been moving up the capital stack into the high grade of the market to a point now when you look at the business, it's roughly 50-50 kind of bottom of the stack top of the stack. And I think that positions us well to meet the needs of our institutional clients on the nonrated side, with the types of returns that you see we can generate and then also to continue to feed the demand for the rated product into our affiliated insurer Aspida and our third-party insurance clients. Maybe back to the credit quality point, and I want to hit it again because there's so many kind of false narratives out there. When you look at where we have positioned our ABF book historically, number one, we have 0 exposure to e-commerce aggregators. Number two, we have de minimis exposure to subprime consumer, it's less than 1% of what we do. We have de minimis exposure to auto. It's about 1%, and it's all prime. So back to kind of underwriting standards, as these markets are growing, we have seen people moving into segments of the market, trade finance where we just never tread. There are probably 25 subsectors that we cover within the broad waterfront of ABF, and there's plenty of attractive deployment opportunity to go around. We're spending a healthy amount of time still around digital infrastructure, partnering with our bank insurance clients around all the various forms of fund finance. And as we said in the prepared remarks, the growth in deployment both the rated and nonrated side has been pretty significant, and I'd expect that to continue. I think you will continue to see consolidation play out in this market, similar to the ways that you saw it play out in kind of the core corporate direct lending market because the benefits of scale are actually big drivers of return here. A lot of these deals are $1 billion-plus transactions. They require a significant capital base in order to drive diversification, and they require a pretty unique set of skills to understand how to underwrite the underlying. So it has been one of our fastest-growing businesses here I think it will continue to be one of our fastest-growing businesses here. And I think the deployment is going to probably still look 50-50 when all is said and done, but remember, dollar of deployment on the Pathfinder side of the house is worth significantly more profit dollars to Ares and the [ dollar ] of deployment on the rated side, and we think that's important for people to understand.

We'll move on now to Brennan Hawken with BMO. .

I had one sort of ticky-tack question and then 1 sort of longer-term perspective. So on the picky tax side, the catch-up fees in secondaries, it looked like the full year was less than what we've seen year-to-date. So was there actually negative catch-up fees in the fourth quarter or was just the prior quarter's revised down? And then I appreciate that the wealth management channel is a smaller source of fundraising for you. But what does your wealth management AUM look like across like major geographic regions, particularly interested in the portion of AUM from Asian investors.

Brennan, it's Jarrod. Thanks for the question. I'll take the first part there, the ticky-tack one. It's just because the secondaries fund, which is our third infrastructure secondaries fund had a close in the third quarter that had the first 3 quarters of it. So as you get to the fourth quarter, there's amounts that were in that catch-up in the third quarter that pertain to this year. So when you look at it for a full year, you have the full year run rate. So that's why the number operates in that manner is because when you have a full year, it's already catching all of those. There's no technical catch-up, but there is for a particular quarter within the year. So that's the difference that you're seeing there.

Yes. I think with regard to wealth, it's a good question because we have seen in some of the prior periods of outflow that you've had Asian investors who have been buying the semi-liquid product on leverage begin to look for liquidity. At least we saw that on the real estate side, I don't know exactly the in-force book in Asia Pacific, but maybe just to frame it, one of the things that has differentiated us on the wealth side is the way that we've built out our European and rest of world distribution. Over the last 2 years, a little over 30% of our capital gathered has been outside of the U.S. which we think is quite unique. I think it's been challenging for some of our peers to get that type of penetration and growth. When I look at where that 30% rest of world is coming from, it is mostly non-APAC. And we're seeing probably most of our APAC flows in the Australia, New

We'll move on to Brian McKenna with Citizens.

So on the ARCC call yesterday, the team talked about the acceleration in activity and deal flow in the nonsponsor channel. What is the incremental opportunity in this channel today from a deployment perspective? Any specifics you can share on the size of the pipeline today versus a year ago? And then I suspect spreads have been more resilient in this part of the market. So how should we think about spreads here versus sponsor-backed deals? And then how that is impacting overall spreads in all in yields for your direct lending strategies.

Yes. Mitch is here from -- who runs our credit group, I'll let him take that one, and I can provide any additional color.

Yes, it's a good question. As we've talked about over the last couple of years in our U.S. direct lending and now increasingly European direct lending business, we've invested heavily in nonsponsor origination in a number of industries, health care, consumer, financial services, infrastructure debt, et cetera, et cetera, they're about 6 or 7 industries. And historically, it's been probably 10% of our originations. And every time we think it's growing, our sponsor business continues to outpace it. We continue to invest it. We're going to be adding people, but you should expect 10% ongoing. And then hopefully, in the next 3 to 5 years, if we're hoping to get it to 15-plus percent of our gross originations in the United States.

In terms of the spread, I think we've always had a historic view here that you should generally get paid more for the nonsponsored business just because it comes with a different set of risks in terms of counterparty liquidity and ability to support growth and then ultimately institutionalize the exit. And generally speaking, I think that, that is true. . There are going to be certain pockets of the nonsponsored business around places like sports meeting and entertainment that may buck that historical you. But I'd say, generally, we would agree with you that we're going to be generating modestly higher spreads. And when we're down the capital stack on junior debt and equity that there's an expectation of higher return just given that you're not facing off with well-capitalized institutional sponsor.

Yes. And it's not just spreads. Typically, our non-sponsored business is a family office, a small public company, an entrepreneur, they tend to be less aggressive in leverage. So not only are you getting more spreads, but is that lower leverage, i.e., less risk and your documentation is a lot better. So there are a lot of different reasons why we like the non-sponsor business. Fortunately or unfortunately, given our presence in the industry, our sponsor business continues to grow at pace and a lot of assets to our book globally.

We'll move on to [ Brendan ] Budish with Barclays.

This is Ben from Barclays. Maybe a quick 2-parter on performance fees. Just first, wondering if you could give any color on FRPR for the year. I know you talked about a potential ramp coming from the REITs. I'm just curious though, I know there's a lot of like open-ended credit vehicles that crystallize periodically. So anything you can share to help us think about that. And then in terms of your net accrued performance income, it looked like the private equity business saw a bit of decline just sequentially. Curious if there's anything there to call out. It sounds like you're optimistic that if markets are constructive, you could see more American style realizations in the back half of the year. So just wondering if there's anything else going on there to be aware of. SP-2 Gary, do you want to take that?

Yes. I got it. Good to hear from you, Ben. On the first part of your question on FRPR, and I tried to walk through in my prepared remarks there. Always tough to say with what inflows will be and then what returns will be, what the contribution could be from the REIT. But as I walked through, I kind of gave an example of how it would have looked this year. And you can certainly see within those filings that happen on a quarterly basis, while we don't record balances at the management company level, you can see within their filings on a quarterly basis what amounts are ticking towards accrual. So we're obviously hopeful to see those returns as we've crossed the high watermark in AREIT and AI REIT is just within spitting distance. The credit side of that equation, as you asked, it's really driven by 2 things. It's the incentive generating pool which continues to increase as we raise new SMAs and it's what credit spreads do for any given period. You did note that we do have some that crystallize on rolling 3 years. We did have that [indiscernible] a year ago. So we're in the second year of that role. I would expect we're probably another year out. So really, the big drivers this year. Credit will be that incentive generating AUM and credit spreads during the year as well as what interest rates do. I think we're really well positioned there. So you'll continue to see FRPR increasing over that time period. And then certainly, PMF, which is our nontraded secondary [indiscernible], that continues to grow. And as it grows, it generates more FRPR for the platform. So we're really seeing it from multiple fronts this year, not just credit not just real estate, but really across the board and across the platform. The AUM that we have in credit, for example, that grew 16% just from the SMA raises and other types of races. On the private equity side, we have a liquid name in that portfolio that balances. You see that move in and out of the accrued carry period-over-period. So it's really driven by that fair value and some of the moves. I think in general, the portfolio is relatively in line. I walked through how ACOF VI is performing, and that's beginning to become the lion's share of that carry with the older vintages monetizing a little bit as we've gone through it. So I think we're really well positioned there, but there's always going to be a little bit of noise because of the publicly traded nature of one of those holdings.

We'll move on now to Mike Brown with UBS. .

Just wanted to ask on private equity. So Mike, in a recent interview with DFT, the idea of getting bigger in private equity came up as part of that interview. And sounds like an acquisition was something that could be considered to get scale there. So can you maybe just unpack that comment a little bit and just spend a minute talking about how you would think about the kind of strategic benefits of being bigger in PE, what that could mean into the platform? And then how do you assess the right fit for Ares in terms of style and size, either AUM or relative to Ares total $600 billion of AUM.

Sure. I appreciate the question. And as was reported in that article, no deal is imminent, and it was really a conversation just about our history of inorganic growth and how we think about it, and this is really no different. We have a very simple framework, which is we want to see cultural accretion and cultural fit. We want to see strategic accretion where we can make the acquiree stronger, bigger, faster, and they bring something to the table that we don't have. And then obviously, we want to see meaningful financial accretion, which I think we've demonstrated handily in places like wealth and real estate and secondaries, et cetera. The argument for getting bigger in PE is number one, given the size of our global business and how deep we are with the largest allocators. It's an asset class that people want to be invested in. Obviously, we've been in the business for 20-plus years with our own strong track record, but we're not keeping up the growth pace that we are with the rest of the business. And so we feel like we can continue to serve the the demands of our client base without over-indexing to private equity. Two, I do think it's important when we talk about capability that you continue to nurture the skill set that comes with equity ownership and value creation within equity portfolios and the larger that we get there, the deeper that capability set becomes and the more we can leverage that capability set across the platform. And so to the extent that we were bigger in private equity, we would be able to obviously begin to add value in other parts of the business like direct lending or our minority stakes business, et cetera, et cetera. The come with a different set of management and Board relationships and operating advisers that we think could be additive to other parts of the business. Fifth, it is a very relevant business for our counterparties on the street. -- in terms of generating leveraged finance business and advisory business. Obviously, 1 of the things that comes with our diversification of scale is that we get to leverage our relationships with -- the Street for deal flow and execution -- and if we were bigger in private equity, that would give us another arrow in the quiver to lean into those relationships in a differentiated way. . And then lastly and maybe most importantly, is as the world continues to move and consolidate, I think that you're going to see the bigger players in private equity get bigger. And I think as the world of defined contribution and wealth open up to increase private equity exposure, the only way, in my opinion, that you can really deliver direct exposure away from secondaries if you have a large enough platform to generate a diverse enough book to actually deliver the right outcome to the end client. And so as we're beginning to see the structural changes happening around 401(k) and wealth, there's a really strong argument that accumulating scale to drive diversity to sit next to our large secondaries business will create a really differentiated product. In terms of financial accretion, I think this is important. Private equity is not a growth business. My colleagues here have heard me say that. that is neither good nor bad. It's just you're not supposed to be driving growth in that business the way that you are in other parts of the firm around real assets and credit. When it does grow, it grows episodically, but it's very difficult to get it to grow linearly at 20% plus the way that we do in other parts of the business. And so that growth differential absolutely needs to get reflected in what we're willing to pay to acquire scale and capability in private equity. And then obviously, as we continue to focus on a real management fee FRE-centric business, we also have to be thoughtful about the way performance fees roll in from growth in private equity relative to where we are today. So there's a financial component to this that has to check a lot of boxes in order for us to get excited about it.

We'll move on now to Michael Cyprus with Morgan Stanley.

Just wanted to circle back to some of the commentary on the software exposure. So [indiscernible] heard software about 9% of private credit AUM. I'm just curious on how that looks across the direct lending book. And then if you could just maybe elaborate a little bit on how the software credits are performing, what trends you're seeing there? And when we think about your underwriting discipline that you spoke to, curious what portion of software deals you passed on and avoided over the last couple of years, last 5 years or so versus 1 you participated in?

Yes. I appreciate that question. I gave a lot of that. I'll try to specifically answer. If you look at direct lending specifically. It's probably 12% of direct lending against 8.7% of private credit. I don't have an answer for how much we passed on, but what I can tell you over the 30 years we've been doing this, our yes [indiscernible] ranges between 3% and 5% generally, across the entire portfolio, meaning we're saying no 95% to 97% of the time. I think it's one of the reasons why we're able to generate the low loss rates that we do. . I would imagine, just having said, around the investment committee table, that the selectivity rate on software would be no different than within that range. One way to also think about, like I mentioned, was kind of the almost near avoidance of ARR exposures at a time when people were ramping up that category. And if you were to look at the way that we've approached that part of the business. As I said, it's less than 1% of the exposure. So that was part of the underwriting funnel.

I will now turn the call back to Mr. Aragetti for closing remarks.

I don't have any. I appreciate everybody spending so much time with us, and I look forward to talking again next quarter. Thank you. .