Ares Management Corp Q3 FY2026 earnings call

• Fundraising Momentum: Raised over $31 billion in gross capital during Q3. Institutional demand remains robust across credit, real assets, and secondaries. Wealth channel equity commitments exceeded $4.2 billion, the second-best quarter on record.
• Deployment Activity: Invested $35 billion globally, led by European direct lending, alternative credit, and infrastructure. U.S. direct lending deployment was slower due to muted M&A but is expected to ramp up in Q4 with record pipeline levels.
• Strategic Acquisitions: Announced the acquisition of MidCap Financial Investment Corporation (MIFIC), expected to close in H1 2027. Also purchased a $1.1 billion direct lending portfolio from an institutional investor.
• Digital Infrastructure Strategy: Focused on core data center buildings and power transmission ($2 trillion TAM) rather than GPU/chip financing, citing clearer underwriting models and lease structures with investment-grade hyperscalers.
• Portfolio Quality: Credit portfolios remain resilient with interest coverage ratios of 2.1x (U.S.) and 2.3x (Europe). Non-accrual rates are stable and below historical averages. Loan-to-value ratios remain near historic lows.
• Secondaries Growth: Secondaries AUM grew ~70% over two years. The inaugural Global Structured Solutions Fund closed at $4.2 billion, significantly exceeding its target.

Total Assets Under Management (AUM) reached $691 billion, with fee-paying AUM at $416 billion, representing year-over-year growth of 16% and 13%, respectively. Management fees totaled nearly $1.1 billion, a 10% increase year-over-year. Fee-related earnings were $524 million with a margin of 42.5%. Realized income was $490 million. Key segment highlights include: Credit strategies showing strong performance with Pathfinder series generating 3.6% quarterly gross returns; Real Estate equity composites returning 1-3%; Infrastructure equity returning 3.7%; and Private Equity (ACOF VI) returning 1.4% with an 18.7% since-inception IRR.

• Full Year 2026 FRE Margin: Expected to be slightly above the midpoint of the 0 to 150 basis point expansion range, driven by catch-up fees from delayed fund closings.
• Realized Performance Income: Full-year net realized performance income is guided to $300–$325 million (Q4 guidance: $160–$185 million). This represents an ~85% growth at the midpoint compared to 2025.
• Earnings Growth: Fee-related earnings (FRE) growth for 2026 is expected to be within the 16–20% annualized target. Realized income growth is targeted at 20–25%+.
• Dividend: Quarterly dividend increased by over 20% year-over-year to $1.35 per share.
• 2027 Outlook: FRE margin growth is expected to accelerate toward the top half of the guidance range due to catch-up fees from digital infrastructure and other funds.

• Interest Rate Sensitivity: While higher rates benefit floating-rate credit returns (83% of credit assets), they increase borrower interest expenses. However, current interest coverage ratios provide a buffer.
• Market Volatility: Geopolitical concerns and rising short-term rates create volatility, though the firm’s diversified platform offers flexibility.
• Commercial Real Estate Disruption: Near-term disruption in capital markets is possible as CRE digests recent adjustments, though fundamentals are improving.
• Digital Infrastructure Complexity: The firm avoids GPU/chip financing due to complex depreciation curves and concentration risks, focusing instead on physical infrastructure with lower risk profiles.
• Redemption Pressure: Some redemption activity has been concentrated in international wealth and small institutional investors, though net new redemptions have decreased significantly quarter-over-quarter.

Q: Analyst asked about the impact of interest rates on U.S. direct lending deployment, noting PE stagnation. / A: CEO stated that while PE slows, deployment shifts to opportunistic credit and secondaries. For U.S. direct lending specifically, he expressed cautious optimism for Q4 pickup due to record pipeline levels converting early in the quarter, countering seasonal norms.

Q: Analyst questioned the firm's absence from IG chip financings in digital infrastructure and their underwriting stance. / A: CEO explained the firm focuses on the $2 trillion TAM for physical data centers and power, which offers simpler underwriting with long-term leases to investment-grade hyperscalers. They avoid GPU financing due to complexity and inability to model technology depreciation curves accurately.

Q: Analyst asked about growth trajectories into 2027 and if U.S. direct lending is the primary upside/downside driver. / A: CEO dismissed deceleration concerns, citing significant embedded fee growth from $117B in non-fee-paying AUM. He highlighted digital infrastructure as a potential unseen upside catalyst for 2027 due to catch-up fees from delayed fund closings.

Q: Analyst inquired about the 'redemption story' in private credit and distributor feedback on ACEF flows. / A: CEO argued redemption pressure is overstated, noting net new redemptions down 60% QoQ and tender requests down 8%. He attributed redemptions to specific international wealth segments burning through queues, while core U.S. wealth remains stable.

Q: Analyst asked if portfolio acquisitions like the $1.1B purchase will become a meaningful deployment channel. / A: CEO indicated this trend will likely grow as PE deals age and borrowers reposition portfolios. He noted these are performing books, not distressed assets, and the firm is well-positioned to buy them due to existing relationships and underwriting resources.