Carl Drake – Head- Ares Management Public Investor Relations Michael Arougheti – President Michael McFerran – Chief Financial Officer Greg Margolies – Co-Head-Credit Group.

Mike Carrier – Bank of America/Merrill Lynch Patrick Davitt – Autonomous Matya Rothenberg – SunTrust Ken Worthington – JPMorgan Michael Cyprys – Morgan Stanley Robert Lee – KBW.

Welcome to Ares Management L.P.'s Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Monday, November 07, 2016. I will now turn the call over to Carl Drake, Head of Ares Management Public Investor Relations..

Good afternoon and thank you for joining us today for our third quarter conference call. I'm joined today by Michael Arougheti, our President; and Michael McFerran, our Chief Financial Officer. In addition, David Kaplan, Co-Head of our Private Equity Group; and Greg Margolies, Co-Head of our Credit Group, will also be available for questions today.

Before we begin, I want to remind you that comments made during the course of this conference call and webcast contain forward-looking statements and are subject to risks and uncertainties. Our actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings.

We assume no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. Moreover, please note that the performance of and investment in our funds is discrete from the performance of and investment in Ares Management L.P.

During this conference call, we will refer to certain non-GAAP financial measures such as economic net income, fee related earnings, performance-related earnings and distributable earnings. We use these as measures of operating performance not as measures of liquidity.

These measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with Generally Accepted Accounting Principles. These measures may not be comparable to like-titled measures used by other companies. In addition, please note that our management fees include ARCC Part I fees.

Please refer to our earnings release and Form 10-Q that we filed this morning for definitions and reconciliations of these measures to the most directly comparable GAAP measures.

Our third quarter earnings presentation has also been filed with the SEC and is available under the Investor Resources section of our website at aresmgmt.com and can be used as a reference for today's call.

I would like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any securities of Ares or any other person, including any interest in any fund. Before I turn the call over to Michael Arougheti, I will provide a quick recap of our third quarter earnings.

We’ve reported significantly improved GAAP net income of $0.45 per unit and after tax economic net income per unit of $0.46 when compared to same period a year ago. Our after tax distributable earnings for common unit were $0.23 well above last year’s level of $0.14.

Keep in mind that our third quarter after tax economic net per unit and after tax distributable earnings for common unit measures have both been reduced by the distribution from our newly issued Series A preferred units, which impacted both numbers by $0.03.

We also declared a common distribution of $0.20 payable on December 5th to unitholders of record on November 21. Now I'll turn the call over to Michael..

Great, thanks Carl, good afternoon everyone. As Carl stated, we generated very strong third quarter results with all three investment groups delivering year-over-year growth in ENI and distributable earnings.

Our earnings benefitted from strong investment performance across our group’s primary fund strategies particularly in our corporate private equity funds and certain credit strategies.

We also took advantage of favorable market conditions to realize a few successful private equity investments and to monetize a credit fund with embedded gains which supported our distributable earnings. Our core fee related earnings also exhibited year-over-year and sequential quarterly growth on higher management fees and strong expense controls.

As we will discuss a little later, we believe that all of the ingredients are in place for solid fee related earnings growth next year. Our broad range of alternative investment solutions across our three investment groups continues to resonate with our existing and new clients.

First in today’s low growth, low rate environment, investors are increasingly seeking differentiated and less correlated investments in order to address the risk return requirements. In particular, we see a greater emphasis on current and predictable yields as well as a willingness to give up liquidity for incremental return.

Many of our alternatives in illiquid credit strategies address these needs. This is further supported by the fact that banks continue to be under pressure from regulators to deleverage or simplify their balance sheets by shedding various non-investment grade corporate and other loans, particularly to smaller companies.

Not surprisingly non-bank alternative investors in various forms are establishing in increasingly prominent position in this asset class. Our leadership in U.S.

and European direct lending and the expansion of our platform across illiquid credit continues to position us for long-term growth and we have some very exciting strategic initiatives underway.

Lastly, as we have discussed in the past, investors are seeking to do business with fewer, more scaled and diversified managers to benefit from sourcing and information advantages as well as to drive efficiencies within their own businesses. We believe that these macro trends are showing up in our continued strength in fund raising.

For the third quarter, we raised more than $4.3 billion in new capital across 26 funds and separately managed accounts and 13 strategies led primarily by new credit funds. Outside of the commitments that we raised in association with our BDC, Ares Capital, we priced our second CLO at more than $700 million as market conditions remain favorable.

We also raised $569 million in new commitments to high yield funds, $390 million in private U.S. direct lending funds and approximately $489 million in liquid and illiquid credit strategies including European leverage loans and European direct lending funds.

In real estate, we had an additional closing on our second European value-add fund of approximately $256 million, bringing that fund over its target of EUR600 million to date. We were pleased with the strong continued interest in our European real estate strategies, particularly following the Brexit vote.

And lastly after quarter-end, we have raised an additional $100 million in our fifth power and energy infrastructure private equity funds. Looking our longer-term, fund raising efforts include new funds across our liquid and illiquid credit strategies, and the next generation of successor funds in real estate private equity.

Across the firm, we continue to expand the investment solutions that we offer across our client base. Existing investors consistently access multiple products in our platform. To wit, during the last 12 months, more than 80% of our direct institutional capital was raised from existing investors.

In addition, nearly 15% of the direct institutional capital we raised during the third quarter came from existing investors entering into a different Ares strategy. Around 42% of our investors or approximately 290 institutions are invested in more one fund with us, up from 23% or only 45 investors just five years ago.

As a result of our fund raising efforts were at a record amount of dry power with more than $24.5 billion of which $18.4 billion is eligible for but not yet earning management fees. Therefore, as Mike will talk about later, we expect deployment will become an even bigger contributor to our earnings going forward.

Turning to investing activities, generally speaking across all of our strategies competition is up, but transaction activity is strong allowing us to be highly selective and disciplined. Our third quarter deployment of $1.8 billion in drawdown funds was relatively flat compared to the same period a year ago.

The deployment was diversified across investments, but driven primarily by our European and U.S. direct lending funds and to a lesser extent in corporate and real estate private equity. Although continued bank retrenchment in both the U.S.

and European markets creates a wide set of opportunities for us, we remain very selective with a focus on financing what we believe are the top 5% of issuers in the market.

In private equity, amid elevated purchase multiples; we continue to seek to uncover growth platforms and franchise assets at a reasonable price to drive growth and create future value. In certain situations, we're also using our flexible capital to unlock value by catalyzing growth through structured balance sheet solutions.

On a positive note, we're seeing a lot of transaction opportunities, but we have to be patient and resourceful to find well priced risk as multiples have been driven higher by the availability of private equity capital and affordable leverage. In real estate, fundamentals across the U.S.

remain favorable with positive demand growth, moderate levels of supply, and a balanced lender universe. We continue to use our broad relationships to find inefficiencies and value in properties and assets where we have expertise.

And in Europe and in the UK, we're seeing broad based stability despite the Brexit vote and slow economic growth, which supports healthy investing opportunities for opportunistic managers like Ares.

A number of successful exits across our corporate PE and credit investment groups allowed us to generate yet another strong quarter of distributable earnings and distributions to unitholders for the third quarter. In our ACOF funds, we exited our holdings in Nortek Inc through a public to public strategic sale.

And one of our energy and exploration platform companies sold a portion of its Eagle Ford assets to a strategic buyer.

We achieved strong multiples of invested capital in these realizations and we view the energy transaction as a particularly great success given our less than three year holding period and what everybody knows a difficult energy environment. In our credit group, we also called the legacy credit fund with embedded incentive fees.

I stated earlier, our fund performance for the third quarter was very strong led by our private equity funds. In the aggregate, our U.S. corporate PE portfolio generated a gross quarterly return of approximately 8.6% with strong performance from our largest PE ACOF IV.

Within our credit strategies, we generated a quarterly gross return of 2.7% for our largest European direct lending fund and Ares Capital similarly had a net quarterly return of just over 2%. In high yield and syndicated loans, we had quarterly gross returns of 4.2% and 2.6% respectively. Within our U.S.

and European real estate strategies, our two largest real estate PE funds, US VIII and EU IV generated gross quarterly returns of 2.9% and 6.9% respectively. And maybe before I turn the call over to Mike McFerran, I'll just provide a quick update on the acquisition of American Capital by our externally managed BDC, Ares Capital Corporation.

As a reminder in May, ARCC announced a merger agreement to acquire American Capital in a cash and stock transaction.

To support the transaction, Ares Management agreed to provide approximately $275 million of cash to American Capital’s shareholders at closing as well as to waive up to $100 million in ARCC Part I Fees for ten calendar quarters beginning in the first full quarter after closing.

To finance our support, we issued 12.4 million Series A preferred units in June for gross proceeds of $310 million. The units are entitled to a 7% dividend and we made our first dividend payment on September 30, 2016. We continue to believe that the American Capital transaction will enhance Ares Management's already leading position in direct lending.

And additionally since the transaction is expected to result in an increase in ARCC's gross assets of more than $3 billion increasing management fees and potential Part I Fees, we expect the transaction will be accretive to our economic net income and distributable earnings metrics.

In mid October, ARCC and ACAS announced December 15 as the date for the special meetings of stockholders.

So assuming the receipt of the necessary stockholder approvals at the meetings and the satisfaction of other customary closing conditions, ARCC expects the transaction to close as early as the first week of January 2017 at which point Ares Management will begin earning fees on the newly acquired assets.

So with that now I'll turn the call over to Michael McFerran to give you his perspective on our financial results.

Mike?.

Thanks, Mike. Before I dive into earnings detail, let me provide some high level financial commentary. First, our third quarter fee related earnings margin improved to 27% from 24% where it had been for each of the three prior quarters.

As we have stated before, we continue to expect that our FRE margins will exceed 30% on a run rate basis once we activate fees on ACOF V, which we currently estimate to be in early 2017 depending on market conditions.

Beyond the step up, we continue to have a number of identified growth drivers, primarily the accretive benefits from ARCC's acquisition of ACAS, continued deployment on funds where we are paid on invested capital and management fees on new funds as we continue to raise capital including the next vintage of significant, successor funds across the platform.

We also expect to remain focused and disciplined on expense controls. A few quarters ago, we laid out the goal of keeping our quarterly G&A expenses below $30 million reflecting our efforts to support margin growth through operating leverage.

I’m pleased to report that these expenses for recent periods have been well below this level with $26.9 million for the third quarter.

Therefore, assuming the success of these growth initiatives coupled with our focus on operating leverage through expense discipline, we believe we will be able to deliver additional margin improvement in the coming years.

As Mike stated, we generated a meaningful year-over-year growth in ENI and distributable earnings reflecting the strong net portfolio appreciation and several successful exits. Our fee related earnings increased in higher management fees and expense controls.

As we have stated in the past, our fee related earnings continue to be the main driver of our distributable earnings over time. But will be supported by exit activity that aids our overall distributable earnings and distributions. We also continued to see momentum in our fund raising efforts to raising $4.3 billion in the third quarter.

This quarter, we continue to experience significant demand for a variety of our credit strategies as investors are increasingly interested in direct lending as an emerging asset class. We also have record dry powder.

And while we remain very selective in our deployment, we continue to find attractive investment opportunities and as we invest we drive additional management fees and potential performance fees. Now with those comments, let me turn a little more detail on our third quarter results.

Our AUM increased by about $5.8 billion to approximately $97.3 billion, a year-over-year net increase of approximately 6%. Our fee paying AUM increased by approximately $2.9 billion, or 5%, primarily driven by new commitments and deployments in illiquid vehicles in the credit and real estate groups.

It's important to highlight that we expect a net increase to our fee paying AUM of approximately $10 billion in early 2017 assuming the activation of ACOF V and the successful closing of ARCC's acquisition of ACAS. We had $24.5 billion in available capital at the end of the third quarter.

Of which $18.4 billion is an AUM, not yet earning fees or otherwise referred to as Shadow AUM. Our Shadow AUM is up 38% from the prior year period. And of that $18.4 billion, we consider approximately $15.8 billion available for future deployment with an expected management fee rate of approximately 1.2%.

This equates to $189.1 million of incremental future management fees. Over 55% of this gross amount in future management fees relates to ACOF V before the step down of management fees of ACOF IV and approximately 24% is related to capital we have raised for our European and U.S. direct lending funds with the largest contributor being ACE III.

Additionally approximately 12% of this amount relates to undeployed capital from our special situations and structured credit strategies and our most recent CLO, Ares CLO 40 that closed in October. So once we activate ACOF V, over 55% of our gross future management fees tied to Shadow AUM will start being earned.

Of course, we expect to experience some runoff and step downs and fee rates as older funds in addition to ACOF IV and their investment periods.

For example, assuming ACOF IV is approximately 70% invested, the associated step down in fee rates at ACOF IV would reduce to $189.1 million and potential incremental management fees by approximately $42.9 million to $146.2 million.

Our incentive eligible AUM increased 28% from the prior year to a record $51.2 billion of which $17 billion is incentive generating and $20 billion is to be invested. Of the remaining $14.2 billion not generating incentive fees, approximately $9.6 billion is within 1% of reaching its applicable hurdle rate.

Our third quarter FRE of $45.3 million was up 5.2% versus the third quarter of 2015 resulting from a 4.1% increase in management fees including one-time catch-up fees in our real estate strategy and a 9.4% decline in G&A as we continue to manage our expenses.

During the third quarter, we saw a significant rebound in our performance related earnings, which reverse losses versus the third quarter of 2015 primarily driven by appreciation in our ACOF III and IV funds in our private equity strategy and liquid credit strategies within our Credit Group.

Our balance sheet of approximately $647 million of diversified investments provided higher third quarter net investment income for us as well driven by appreciation on our holdings in our corporate private equity strategy, including ACOF Asia and within our liquid credit strategies.

As Mike mentioned, this was a strong quarter for realizations on our corporate private equity funds, which supported the increase in distributable earnings.

Our third quarter distributable earnings were $66.7 million despite realizing a $20 million loss on a strategic minority investment in a multi-strategy hedge fund platform that was unable to scale profitably.

Our strong distributable earnings, net of a $6.8 million of preferred equity distribution translated into DE per common units of $0.23 compared to $39.6 million a year ago or $0.14 per common unit. Without the preferred distribution, DE per common units would have been $0.26.

Going forward, we expect the quarterly distribution in our preferred units will be $5.4 million since the third quarter distribution of $6.8 million included a stub period from the second quarter.

As we mentioned on previous calls, we expect that activating management fees for ACOF V, net of the assumed step down of ACOF IV, I spoke about earlier, would generate approximately $65 million of net growth in management fees translating to approximately $0.06 per quarter of incremental after-tax distributable earnings per unit as of September 30th.

While the investment REIT environment and our corresponding deployment will dictate when we activate and begin the investment period for ACOF V, our best estimate is early 2017.

Moving to distributions, this morning, we announced a distribution of $0.20 per common unit for the third quarter, which totaled approximately 85% of our distributable earnings. This distribution will be payable on December 5th to common unitholders of record as of November 21st. Now, I'll turn it back over to Mike for closing remarks..

Great, thanks, Mike. Before we take your questions, let me leave you with just a few closing thoughts. The macroeconomic tailwinds for alternative managers like Ares continue to be positive particularly with respect to the demand for yield and illiquid credit.

We talked about our investment performance continues to be strong across the platform and our existing clients as well as new investors are validating this performance by committing new capital to us in both existing and new strategies and across multiple products on the platform.

We're expanding our platform by introducing new or adjacent products where we can leverage our existing expertise and track record as a way to satisfy this demand. We have a record level of dry powder and Shadow AUM, which is very long dated and which we expect will drive FRE growth and FRE margins over time.

Mike talked about we believe the combination of our Shadow AUM deployment including ACOF V and the expected earnings accretion from the ACAS transaction will catalyze earnings growth for the next year and into subsequent periods.

And lastly, we have a record level of incentive eligible AUM providing significant upside potential for growth in future performance fees in coming years.

Its simplest form over the long-term, our goal at Ares is to be a consistent value added partner to our investing clients by offering a broad array of credit strategies with net returns of 5% to 15% and a variety of corporate infrastructure and real estate private equity strategies with the goal of generating 50% plus net returns.

And as you can see from this third quarter, we continue to perform well across all of these strategies by leveraging our knowledge, expertise and relationships to source, evaluate and manage opportunities in these asset classes.

We believe that this positions us well to capitalize on the overall favorable market conditions for alternative asset managers, particularly in potential periods of volatility.

So, with that maybe just a quick thank you to our team for all of their continued hard work and thanks to our investors for their continued support and for everyone's time today. And with that operator I think we’ll open up the line for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Mike Carrier from Bank of America/Merrill Lynch. Please go ahead..

Hi, thanks guys. Hey, Mike, maybe first one just on the distributable earnings and the outlook, I know you mentioned the outlook for FRE, which helps the distributable earnings and the distribution going into 2017.

I just wanted to get a sense, when we look at, whether it's ACOF III and IV, the credit funds that can have realizations, just any color that you can provide on maybe seasoning the products and what we could like potentially expect in a favorable market backdrop in terms of exit activity versus maybe the past two quarters where you have seen some realizations there..

So I'll give just a little bit of a qualitative overlay and Mike McFerran can chime in with a quantitative view. I think it's important, Mike, that we refocus people on the unique attributes of Ares in the alternative asset management space.

And as we've talked about consistently since our IPO, the percentage of distributable earnings that we achieved from FRE is significantly higher than the peer group. And that's a function obviously of the nature of the strategies that we manage as well as driven by the diversity of funds that we manage.

So by definition, I think what we've tried to project and you see this in the results is that the level of DE should be more predictable and stable over time and a larger percentage of DE should come from FRE.

As Mike McFerran talked about, I think the good news is going into Q4 of 2016 and into 2017 with the amount of Shadow AUM particularly coming from ACOF V and the catalyst of the ACAS Transaction just taking that very basic tenant of higher FRE to DE contribution.

I think you can draw a pretty significant path to distributable earnings growth going into 2017. With regard to the timing of realizations obviously it's going to be situation specific and dependent on market conditions.

And as we've talked about on past calls, I do think one of the things that make us unique as well is when you look at the fund strategies that we manage they all tend to be cycle durable and all weather.

As an example, if you look at our private equity strategies where we're making platform investments in growth companies alongside potential distressed or balance sheet restructurings not only do you see a more level pace of deployment, but I think you see a more level set pace of realization.

And so while there's no good predictor as to when we’ll be harvesting. I think if you look, you'll see more consistency in terms of the pace of deployment and realizations versus some of the peer group..

Just add on to that, Mike. So if you think about our accrued net performance fees, they totaled $141 million as of September 30th. So, as Mike touched upon, we don't have a crystal ball when those will be realized.

However as you see I think it's on a slide in our earnings presentation that about two thirds of that amount relates to private equity and if you further look at that and look at where our realizations have been coming from, it's going to be opportunity driven.

But as Mike touched on, we've mentioned on the call the $0.06 step up in core contribution to DE just from the activation ACOF V.

What we haven’t touched upon is in addition to ACOF V, the closing of ACAS as well as the undeployed dry powder, which all of those in aggregate we mentioned had about $189 million of growth management fees for any step downs associated with it.

So looking forward, I think what's really favorable and what we're excited about is this continued growth of the core contribution to DE irrespective of performance related earnings..

That's helpful. And then just a quick follow-up, the fund raising has been strong. It seems like there's – and you mentioned it, Mike, just in terms of the demand by the client base for yield and willing to give up some of the liquidity for the opportunities – it seems like there’s a lot of money going into that space.

So, I the two questions are, in terms of you guys differentiating yourself and having like a long track record in these areas, how much is that helping you? And then I think you mentioned some of the stuff on clients in terms of the number of products that they're in. But maybe more importantly, when you think about non-U.S.

institutional traction or high net worth traction, just where are you on the distribution side, given the demand for some of these products?.

Sure, so two separate questions. Maybe we'll hit the second piece first.

The demand that we're seeing, as I mentioned, is broadly coming from existing and new clients, but the trend that we're seeing, which we’re happy about is that our existing clients continue to make up the majority of new capital raise and those existing clients are finding it within themselves to invest across the platform in multiple strategies.

And some of the numbers that we quoted in the prepared remarks, I think, are pretty dramatic when you look at a growth in clients in multiple products growing from 23% to 42% in a five year period, not even addressing the aggregate growth in institutional clients on the platform.

So clearly, some of the investments that we've made in asset gathering business development and investor relations, over the last five years, are bearing fruit.

As we also talked about in the prepared remarks, the global theme of yield, thirst for yield, non-correlated yield is obviously creating a pretty significant amount of demand in every corner of the market for alternative credit products.

We're seeing that from retail investors given the demographic within the retail population and the shift from defined benefit to defined contribution plans. We're seeing it in the insurance space as folks are dealing with low fixed income returns and solvency two, going into solvency three.

We're seeing it in the pension community as folks are trying to address actuarial payout requirements. So not surprisingly in this rate environment, the appetite that the investors retail and institutional have for yield is quite significant. I think the good news is that demand from investors’ lines up squarely with the products that we have.

And to your point, it's lining up in products where we believe that we've created meaningful competitive advantages.

So anytime you're in a market, where you’re seeing this amount of liquidity coming into an asset class as a good manager you have to take pause and evaluate whether or not it impacts deployment or the quality of the returns that we're getting.

But when you look at what we've built particularly in our credit business, we have significant competitive advantages in terms of sourcing and origination. We've created significant advantages in terms of research and information.

And so that portfolio effect that has gotten created through the over 1,200 investments that we have across our credit platform, we think are still positioning us to make very good risk adjusted returns despite the amount of liquidity in the market.

But that said it’s something you have to keep your eye on in both the liquid and illiquid markets as capital continues to flow into the markets. We constantly are evaluating whether or not we're seeing an impact. At least today, our view has actually been a net positive transaction activity is up.

It allows us to use our comparative advantages to drive what we think is still high quality deal flow. And we haven't really seen significant erosion in terms of structure. I’d say the only thing we're probably seeing is less differentiation across the markets based on credit quality.

So a lower quality issuer is probably commanding similar terms in structure than a higher quality issuer, which is why it's so critical as we've always talked about to be able to identify those best borrowers of those best investment opportunities in the market..

Okay, thanks a lot..

Our next question will come from Patrick Davitt of Autonomous. Please go ahead..

Hi, thank you. To your last point, there's been obviously a lot of regulatory and press chatter about the potential for risk you’re lending and the shadow banking sector. And I imagine that a lot of the riskier stuff crosses your desk.

First, to that last point, do you think that the chatter is fair, that private pools of capital may be doing more wreckless lending? And second, if so, have you seen the pace of those kinds of deals that you might feel are a bit stressed as increasing over the last year?.

So, it’s hard to comment on what other people are doing. So we can comment on what we're doing. And I don't feel that our underwriting criteria or our investment behavior has changed one iota given some of the trends that that we're talking about.

I also think it's important that when we talk about what's driving the growth in some of the credit spaces away from just the interest rate environment and investor behavior is they are leaving the banking system. And the fact that they're leaving the banking system doesn't by definition mean that they're riskier loans.

It just means that because of regulatory capital or changes to the structure of bank business models, they're not being funded within bank balance sheets, but they're being funded within the wholesale funded market. So I for one at least in the seat that I sit and I'm not seeing what I would think of as reckless lending behavior.

I think what we are seeing as I talked about is the potential for structural deterioration or return deterioration if the liquidity in the market continues and the supply of investment opportunity doesn't keep pace.

At least what I'm seeing today, the supply of investment opportunity in the credit space is still keeping pace with the amount of capital that's getting raised. And for folks like us that have built real barriers and competitive advantages, I still think that it's a great, a great time to be investing.

I don’t know Greg if you have a different view on….

I would say consistent, our approach to credit and our hurdles that we have to cross to make an investment decision really haven't changed. And I don't think our credit quality in our portfolios has deteriorated at all..

Okay, thanks.

And then quick follow-up on the – what would be distribution had been without that one big realized loss you talked about?.

We said we realized $20 million, so the tax impact of that off the top of my head but at least on a pretax basis, it totaled about $0.09..

Great, thank you..

Okay..

Our next question will come from Doug Mayweather of SunTrust. Please go ahead..

Hi good afternoon. This is actually Matya Rothenberg filling in for Doug Mayweather. Thank you for taking my questions..

Sure..

On the reclass of special situation from credit to private equity, is that just like administrative or does it represent a change of strategy?.

So, David Kaplan, who runs our PE group will take that one..

I would….

Okay, thank you..

Sure. I would not characterize it as administrative and I would not also characterize it as a change in strategy.

I would say that the dynamic in the distressed market and just to remind folks the ACOF funds historically are approximately 50% of capital has been deployed in a distressed or controlled strategy, 50% in what I would referred to as regular way private equity, so very much in the distressed business.

The market dynamics are such that credits are move, move quickly, trading is moving very quickly and the coordination of our more distressed trading strategy in the form of SSF, special situation funds, and our distress for control efforts in our private equity funds, ACOF, having those under one roof if you will on a day to day basis being more coordinated.

We think is a win-win for each strategy, very simple..

I understand. Thank you.

And then on the CLO that you closed – whether you closed during the fourth quarter, have you seen investors' appetite improving in line with the general demand for yield or has demand for CLO specifically improved, as well?.

We've seen investor appetite increase for CLOs as we get closer to risk retention compliance. So, you're seeing an increasing amount of CLOs getting done in the fourth quarter as a pull forward from the first quarter of next year.

But generally you've seen liability spreads come in, which has improved the arbitrage within the CLO, and that has given the global negative or low-yield environment that has really attracted a number of equity and mezzanine investors to the space..

Okay, thank you. That's all I have for now..

Thanks..

Our next question will come from Ken Worthington of JPMorgan. Please go ahead..

Hi. Good afternoon. Maybe, first, compensation – you've kept it stable or really modest growth for some time.

As we think about your plans for continuing to grow the business in 2017 and 2018, how should we think about maybe headcount growth expectations, maybe your ability to leverage existing personnel as you launch more products? And ultimately like how do we kind of hone in on compensation growth over time?.

We said at the beginning of this year that our compensation had stepped up as we entered 2016, as we had been making investments to manage the new capital we are raising, and make investments to raise that capital.

So, I expect, just by a function of increased profitability, comp will grow modestly in the future as you look ahead to 2017 or 2018, but similar to G&A, I think we're maintaining a lot of discipline about headcount and compensation growth.

And to your point, if we look at it Q2 to Q3 at least just sequentially quarter-over-quarter the comp was effectively flat. So, I think we're doing a good job there and we expect to continue to do so going forward..

Okay. Is that a function of your investment professionals and your sales professionals kind of doing more with less? Or can you help me just get a better understanding of – I understand you're disciplined, but how are you being disciplined? What does discipline really mean? I see the end result of it..

Yes, I mean, look the end result, I think, you're seeing is getting more operating leverage. But again, comp hasn’t been flat the last 12, 18 months. I mean we have seen an increase in comp in 2016 over 2015 that was not insignificant.

And that was again I think we had front loaded a lot of investments across operations, business developments and our investment teams as we are out raising and starting to deploy that capital. And as you know for a lot of the money we manage, the revenue trails the expense load.

So I think when we talk about, one, there’s the time factor of this where a lot of those investments have been made. And then the discipline is just the discipline, similar to G&A, of us just running a good business and making investments where we think there's an attractive ROI for us.

Okay, great, thank you. And then indicated, I think, gross returns of 2.7% in Q3 for a portion of direct lending.

Can you give us the Q3 performance figures for tradable credit maybe broadly in Q3, if that's possible?.

Sure. We’ll grab that right now..

Okay. Maybe I'll just sneak one in while you're looking for it..

Go ahead..

Sorry, go ahead..

No….

You indicated $14.2 billion of incentive eligible AUM, of which I think 68% was within 1% of the hurdle rate. 3Q was a pretty good quarter for credit. And given our perception of strong returns in 3Q, maybe talk about why Ares didn't see more of the non-ARCC AUM within that 1% of the hurdle rate migrate to incentive generating AUM this quarter..

Sure. So, you’ve got to look – if you look back over the last 12 months, we've raised over $24 million. We’re now in capital deployment mode with a lot of money we've raised.

When you're in the early days of that, you're working to get through and the respective hurdle rates or preferred return levels for each of our funds, some of it is a function of, frankly, younger vintage of a lot of that capital..

Okay. Okay, great, thank you..

In fact, on the performance, I'd direct you to slide 28 in our earnings presentation that was on the website, you will see a breakout for within tradable credit, our high yield performance for the quarter on a gross basis, was 4.2%, the loan performance for the quarter was 2.6% growth..

Okay, great. Thank you..

Our next question will come from Michael Cyprys of Morgan Stanley. Please go ahead..

Hi, good afternoon. Thanks for taking the question. I just want to dig in a little bit on investment income within the operations group management segment that you have. Can you just elaborate a little bit more on what drove the $20 million realized loss. I think you maybe mentioned something about a hedge fund.

Just curious if you could elaborate on that, how much more losses could we see. But then also within that segment it looked like there was a $4 million positive unrealized mark. If you could elaborate on what's driving that and just maybe flush out what the $86 million investment balance is for that particular segment..

Sure. So just to help folks understand that bucket and then we’ll address the investments specifically. Effectively when they are in the operations management group, effectively what we’re saying is they don’t fit squarely within one of the three core business units.

So often times we’re using that portion of the balance sheet to incubate new product ideas, launch new business initiatives et cetera, et cetera. Within that bucket one of the investments we made was in a multi-manager, multi-strat hedge fund platform called DMOS.

We launched that entity about two years ago with a spinout of a team and a systems platform from Guggenheim Global Trading.

The investment thesis behind that business was A similar to what we were talking about in our core PE credit and real estate businesses, institutional investors are continuing to consolidate relationships with broader managers and we saw an increasing demand coming from some of our core clients for that particular strategy.

And then number two, we had a prevailing view at the time that the multi-strat, multi-manager strategy itself was actually a pretty important value proposition to the institutional investor base giving them the ability to more efficiently access multiple strategies in one location, which had the impact of a reduced operational due diligence burden, it gave folks comfort with the risk and compliance infrastructure.

And then, similar to what we’re seeing with folks who are dynamically allocating across our platform now, would give the institutional investor the ability to allocate in a more frictionless way across various equity long/short strategies. The fund got off the ground with some capital from a significant institutional investor client.

It maxed out at about $350 million of capital. And then telling folks on this phone what they know, obviously the hedge fund space came under a significant amount of pressure.

The business was actually generating quite healthy relative returns but on an absolute basis, just given what’s been going on in the equity markets, it was our view that this was not the environment to scale that platform. So, in essence, we wound down the existing fund, collapsed the systems, and have moved on.

The $20 million was the full extent of the investment that we had made in that platform, so you should not expect to see any incremental economic impact to come from that..

And then to follow on with what’s in the balance at September 30, as Mike mentioned, with the $20 million written off and no residual value held to it, a majority of what makes up that $86 million relates to the investments we made in certain Kayne Anderson funds, which, we would note, from the time of investment collectively are up just over 25%..

How should we think about modeling that line on a go-forward basis? Any suggestions there?.

I think it’s hard. I would not expect a significant amount of increase there, for the following reason. As we’ve talked about before, when we think about the balance sheet, the core focus of the balance sheet is to support growth in existing businesses.

And a large portion of the investments that we have is a diversified portfolio of $645 million right across 60 separate funds that we use to effectively support GP commitments within our three core business units.

Where we see the opportunity to incubate new strategies again, we’ll use that other bucket, but the bulk of what we’re using the balance sheet for, as you’d expect, is for the continued growth from the core business. So, I would not expect a significant amount of growth there.

And I would say, as a percentage of assets, if it’s growing it would probably grow in line with the existing proportions..

Great, super. And if I could just ask a follow-up on a separate topic, just on M&A. Curious how you’re thinking more broadly about M&A for Ares Management Company.

Certainly you’ve been active in different parts of your business but as you look out over the next, say, three to five years, how are you thinking about that today?.

Yes, we think about it a lot. I think, as you highlighted, we’ve been very successful acquiring fund managers of different sizes and different strategies. As I’ve commented on prior calls, two things are really driving this. One, there’s absolutely a consolidation trend broadly in the alternative asset management space.

That’s being driven by some of the things we’ve talked about, like investor appetite for fewer relationships where they see a recognition that scaled platforms can provide better performance, broader product set and drive efficiencies in their own business. I don’t expect that to abate.

So, I would think that the investor consolidation will drive disproportionate growth in the larger platforms. And then, second, as we’ve talked about on prior calls, too, there’s a little bit of what I’d call an aging out of some of the existing institutional asset management platforms.

If you think about the evolution of the alternative asset management space, whether it’s private equity or credit, many of the platforms got their start in the late 1980s or early 1990s. Founders are getting on in years.

They are faced with the question of what is the legacy of the business, what kind of investments do I need to make to continue to support growth.

And then you have the new generation of partners who are thinking about the ever-changing world of alternative assets and how do they get to a platform that positions them for continued outperformance and growth in their own careers and opportunities.

So, the consolidation trend, I think, is actually also being supported by the fact that there’s more platforms that are becoming available to support some of these things. So, as you would imagine, given the position that we sit in we see a lot of those opportunities.

And when we see them, we’ve always talked about the fact that we put a pretty rigid filter in place to evaluate them.

And any M&A opportunity we look at, A, has to make significant strategic sense i.e., we have to be in a position to make that business better and we have to have a view that they will bring something unique to our platform and make our business better; two, it has to make financial sense, it has to be accretive and have a high ROIC; and, three, and probably most importantly, it has to be a great cultural fit because, as everybody knows, in the investment business the culture investing can’t be compromised.

That may sound simple, but getting an opportunity to check all three of those boxes is not all that straightforward. So, we look at a lot of things. We’re constantly evaluating inorganic growth opportunities but the hit rate is low but it will definitely continue to be a part of our strategy going forward.

And if you look at the history of the firm you’ll see that we’ve used M&A as a very good tool to step out off of existing core competencies in our credit real estate and private equity businesses..

Great, thank you..

And our last question will come from Robert Lee from KBW. Please go ahead..

Great, thanks. Good morning or good afternoon, everyone. My question is maybe on the CLO business. I’m just curious. You’ve seen in the different press reports, different competitors looking to try to form third-party vehicles to provide kind of the equity for their CLO.

Could you maybe talk about how you guys think about your retention? Is that something you’re exploring or interested in? Or do you like having – keeping it, to some degree, on your balance sheet?.

I think Greg could take that one..

Sure. The good news is there’s actually a variety of ways to satisfy risk retention in about the third-party vehicles as well as with financing vertical slices of the capital that’s required. And we are comfortable accessing all of the different types of capital that we would do in order to satisfy risk retention.

Historically, we’ve also taken down all of the capital necessary to satisfy risk retention. Our view is we actively look toward finding the most efficient form of capital, the cheapest form of capital, and the best partners to do that with, to figure out which of those we will do.

We are actively – we’ve raised a risk retention third-party capital vehicle in Europe. And we continue to explore a variety of different options in the States and we will likely tap any and all of those three different options that we’ve talked about to raise our capital going forward.

I think what it really means is fewer and fewer of the CLO managers out there will be able to access the type of capital that’s required to meet risk retention requirements going forward and you’ll see the larger players like ourselves who do have access to a variety of forms of capital will continue to consolidate the space..

And I’m just curious, a bunch of years ago you saw consolidation in the CLO space post financial crisis.

Are you saying the risk retention will start to lead to consolidation in the CLO space? Or is it more just existing managers running off what they have and new issuance is going to be concentrated more at firms like yourselves who can figure out how to provide that equity?.

That is both. We saw a real uptick in CLO consolidation, M&A activity in the back half of last year and the first half of this year. Things have slowed down a little bit since then but I’d expect it to tick up again as risk retention becomes – that bites in the fourth quarter of this year.

That being said, you will see some guys who will continue to just run off their platform, with the larger guys being the preponderance of the new issue. But I do expect us to see a heightened amount of M&A activity in CLO managers going forward..

Great, thanks. Most of my other questions were asked so I appreciate you taking my question..

Great. Thanks, Robert..

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

Great. We don’t have any, other than to thank everybody again for all of the time and interest and support. And we look forward to speaking to everybody next quarter. And don’t forget to vote. Have a good day. .

Ladies and gentlemen – thank you. Ladies and gentlemen, this concludes our conference call for today.

If you missed any part of today’s call an archive replay of this conference call will be available through December 6, 2016 by dialing 877-344-7529 and to international callers by dialing 1-412-317-0088, for all replays please reference conference number 10093690.

An archived replay will also be available on a webcast link located on the homepage of the investor resources section of our website. Thank you and you may now disconnect your lines..