Ares Management Corporation (NYSE:ARES) Q4 2022 Earnings Conference Call February 9, 2023 12:00 PM ET
Company Participants
Carl Drake – Head, Public Markets, Investor Relations
Michael Arougheti – Chief Executive Officer
Jarrod Phillips – Chief Financial Officer
Kipp deVeer – Director, Partner, Head of Credit Group
Conference Call Participants
Craig Siegenthaler – Bank of America
Alex Blostein – Goldman Sachs
Benjamin Budish – Barclays
Michael Cyprys – Morgan Stanley
Gerry O’Hara – Jefferies
Patrick Davitt – Autonomous Research
Adam Beatty – UBS
Operator
Hello, and welcome to Ares Management Corporation’s Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Thursday February 9, 2023.
I will now turn the call over to Carl Drake, Head of Public Markets Investor Relations at Ares Management. Please go ahead.
Carl Drake
Good afternoon, and thank you for joining us today for our fourth quarter and year-end 2022 conference call. I’m joined today by Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. We also have a number of 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 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 any Ares Fund.
During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from, or a substitute for measures prepared in accordance with generally accepted accounting principles.
Please refer to our fourth quarter and full year earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures.
Note that, we will plan to file our Form 10-K later this month. This morning, we announced that we declared our first quarter common dividend of $0.77 per share of its Class A, and nonvoting common stock, representing an increase of 26% over our dividend for the same quarter a year ago. The dividend will be paid on March 31, 2023 to holders of record on March 17. Jarrod will provide additional color on the drivers of the significant increase in our quarterly dividend later in the call.
Now, I’ll turn the call over to Mike Arougheti, who will start with some quarterly and year-end financial and business highlights.
Michael Arougheti
Thanks, Carl, and good afternoon. I hope everybody is doing well. Despite significant volatility and uncertainty in the markets throughout the year, we generated exceptional growth and strong performance across our financial and operational metrics. Year-over-year, we grew 32% in management fees, 40% in fee-related earnings, and 30% in after-tax realized income per Class A common share, while also delivering a strong year of fund performance for our investors.
This financial outperformance during challenging markets isn’t new to Ares, as our management fee-centric business model and flexible investing approach have enabled us to accelerate our growth during past turbulent market cycles and recessions.
The strong relative performance of alternative investments last year, compared to the publicly traded equity and fixed income markets only further reinforces our belief in the benefits of private market investing.
Investors remain significantly under allocated to alternatives, which represent just over 10% in total global AUM. With a robust fundraising pipeline and our expanded investment capabilities heading into 2023, we believe that we’re well positioned for continued strong growth as we expect investors to increase their alternative allocations.
While 2021 was a transformational year for our platform, with multiple strategic acquisitions, 2022 was a year of integration, and platform building to position the company for future growth.
During the year, we added approximately 450 professionals with 150 in origination and investing, and 85 in fundraising and wealth management, including new senior wealth management heads in Europe and Asia Pacific.
We also spent the year enhancing our retail platform through product expansion, growing our distribution capabilities and deepening relationships with strategic distribution partners.
Our affiliated insurance business, Aspida began directly originating annuity contracts in late June and finished the year with significant growth and momentum. We also continue to expand our relationships with existing and new institutional investors and experienced a significant increase in our institutional strategic partnerships.
For the year, we added over 100 new institutional investors, while seeing over 90% of inflows coming from existing investors either through reups or commitments to new products. At the end of 2022, nearly 90% of our AUM was from investors that held multiple funds managed by Ares.
We ended the year with $352 billion in AUM, an increase of 15% from $305.8 billion at the end of 2021 driven primarily by fundraising of $57 billion, including more than $12 billion in the fourth quarter. Although, we didn’t have many large commingled funds in the market last year, our fundraising benefited from a growing base of capital from non-campaign fund sources, including our perpetual funds, certain managed accounts and other smaller funds.
To that point of the $57 billion of fundraising in 2022, over $40 billion was capital raised from outside of our 20 largest institutional commingled fund families. We also continue to innovate and offer new strategies to our investor base. For example, more than 40% of our fundraising last year was from new strategies or products that didn’t exist five years ago at Ares.
During the fourth quarter, we held notable fundraises, including a first close on our fourth US opportunistic real estate fund of more than $1.4 billion; and a final close on Infrastructure Debt Fund V, which reached approximately $5 billion of committed capital including related vehicles. We believe that our Infrastructure Debt Fund V is the largest infrastructure sub debt fund ever raised and is a testament to our leadership in that segment of the market.
Also our non-traded BDC Ares raised $847 million of equity commitments in a private placement in November through January and closed on a $625 million leverage facility. While we experienced a slowdown of net inflows into our two non-traded REITs flows remain positive with a combined $440 million of gross quarterly proceeds inclusive of our 1031 exchange program versus $157 million of quarterly redemption requests. We believe that our all-weather careful investment approach, lower use of leverage and sticky capital within our 1031 exchange program benefits our fee-paying AUM.
In addition, we’re still growing the distribution capabilities around the non-trade REITs. In December, we added a second large wirehouse for distribution and we expect to add two or more wirehouses or private bank relationships for our suite of retail products in the first half of this year. We anticipate additional inflows from these new relationships over time, as we continue to ramp our sales efforts.
We are firm believers that the long-term growth opportunity for alternative products in the retail channel will be robust. Retail investors are meaningfully under allocated to alternatives compared to some institutional investors and key allocators across the retail space are looking to meaningfully expand their exposure to alternatives. Over time, we intend to offer drawdown and evergreen style strategies across our primary asset classes suited for both mass affluent and high net worth investors.
As you may recall, we didn’t expect 2022 to be a record fundraising year for us without many of our largest fund families in the market. For 2023, driven by the recent launch of several of our largest commingled fund families, we believe our aggregate fundraising will be well in excess of last year’s and will approach our record in 2021 of $77 billion.
In the aggregate, we expect to have approximately 30 commingled and perpetual life funds in the market this year including seven of our 10 largest institutional commingled funds.
We’re observing a flight to larger higher quality managers as investors are consolidating their allocations with preferred managers. Not only does this scale benefit us in fundraising, but it could enhance our competitive advantages as other players have less capital to deploy.
As an example, late last year, we launched our sixth European direct lending funds and most of the predecessor funds largest investors are working towards making a commitment in the first close.
We expect to have a substantial first close in this fund in late Q1 or early Q2. We also recently launched our third US senior direct lending fund and expect to see similar demand for that fund as well with the first close slated for the second quarter. The total capital for the previous vintages for these two European and US direct lending funds was just over $30 billion combined including fund leverage.
Additionally, the second vintage of our alternative credit fund is in the market and we anticipate a first close in late March or April. As a reminder, our alternative credit strategy deployed flexible capital, focused on large diversified portfolios of assets that generate contractual cash flows.
The fund carries a unique performance fee structure where 10% of the carry, half from the investment team and half from Ares goes towards charitable initiatives tied to global education, fighting global hunger, and the Ares Charitable Foundation.
Initial investor engagement has been very active across all three of these large private credit funds and we expect strong demand for all of these products. We recently launched fundraising for our seventh corporate private equity fund, which we believe is particularly well suited for the current volatile market environment due to the team’s flexible approach and ability to invest in distressed for control investments in addition to traditional buyout transactions.
Turning to deployment. Despite the lower overall transaction activity, our market share gains in private credit continued to drive strong aggregate investment activity across the platform. In Q4, we deployed $21.8 billion of capital, representing a 19% increase compared to the third quarter.
On a full year basis, we deployed $79.8 billion, which was flat compared to the $79.7 billion we invested last year which we believe is pretty remarkable given the slowdown in overall deal activity year-over-year. This drove our fee paying AUM to $231.1 billion, a 23% increase compared to last year.
We continue to see very attractive investment opportunities across our private credit funds with all-in yields and fees on first lien direct loans of 10% to 13% with good covenant packages.
In opportunistic real estate equity where we just held the first closing in the fourth quarter, we’re beginning to see a small number of investment opportunities come to market, driven by liquidity pressures.
In our PE business, our special opportunities team has been active with over $650 million deployed in the quarter in a mix of rescue capital, enterprise value-enhancing transactions, and stressed or distressed public credit purchases. In our secondaries business, we’re seeing a growing number of both LP- and GP-led opportunities as certain LPs seek liquidity and fund sponsors seek to accelerate liquidity into legacy fund vehicles. Overall, among our many strategies that can take advantage of constrained liquidity in the market, we’re seeing more activity for our private capital solutions. Going forward, with nearly $85 billion of available capital and several large first closes for our large commingled products in the coming months, we expect to have a strong capital base to take advantage of the market opportunities for our clients.
I mentioned earlier that our affiliated insurance platform is gaining momentum after launching the annuity origination business in June. In the second half of 2022, Aspida nearly doubled its AUM to $6 billion, up from $3.6 billion in June including an additional $1.4 billion in the fourth quarter. We’re now building an attractive portfolio of assets without the issues associated with the legacy back book. As we seek to raise additional third-party capital, we expect to scale our affiliated insurance platform further in the coming years.
Our portfolios are generally defensively positioned as we head into the New Year. With nearly 60% of our invested assets in floating rate credit, we continue to benefit from rising interest rates. And these assets are generally in the top half of the capital structure which further enhances our positioning.
In our US and European direct lending portfolios, we continue to see solid fundamentals, low defaults and resilience in our credit metrics with weighted average loans to value at year-end of 46% and 49.5% respectively, as well as continued strong EBITDA trends with last 12 months’ comparable growth of 9% for both the US and European portfolios.
Our global real estate portfolio continues to see strong rental growth and high occupancy rates, with our highest conviction sectors of industrial and multifamily, which comprises approximately 77% of our gross assets. In addition, other adjacent high-conviction sectors such as single-family rental, self-storage and life science accounted for another 11% of gross assets.
Our non-traded REIT, AREIT reported multifamily rent increases on new leases and renewals of 13.1% and 11.6% respectively. In our AI REIT industrial-only portfolio, 99% of our space is leased. And during the year over 10% of the portfolio issued new or renewed leases at an average increase of 47% growth above the comparable or previous lease rate.
Our global real estate portfolio overall continues to be underweight in office with less than an 8% allocation across the global portfolio and most of our exposure in the US is in the real estate debt that’s largely senior in the capital structure. Our private equity group’s portfolios continue to perform with year-over-year EBITDA growth of 9% and are positioned in more defensive sectors like healthcare, business services and light industrials.
We believe that the strong secular growth that we continue to experience across our business is ultimately a result of our strong and consistent performance. In 2022, nearly all of our strategy composite returns outperformed comparable public markets for the year.
And now I’d like to turn the call over to Jarrod for comments on our financials and additional details on the performance of our funds. Jarrod?
Jarrod Phillips
Thanks, Mike. Good afternoon, everyone and thank you for joining us today. I’ll begin with a review of the fourth quarter and the full year. Then I’ll provide an update on our outlook for 2023 and beyond. As Mike stated, we experienced strong growth in nearly every financial metric, including management fees, fee related earnings, realized income, AUM and FDAUM for both the fourth quarter and the full year when compared to the prior year.
In 2022, as we’ve seen in past markets, Ares Management fee centric and FRE-rich business model delivered strong results despite the turbulent economic environment. Starting with our revenues, our management fees increased 23% for the fourth quarter and 32% for the full year, driven primarily by the strong deployment of our invested capital. Our management fee stability remains a key differentiator for our business model and enables us to better manage short and long-term market dislocations.
As of year-end, 95% of our management fees were derived from either perpetual capital or long dated funds, which reduces the risk of significant redemptions even during severe market movements.
Other fee income was approximately $25 million for the fourth quarter and was just shy of $95 million for 2022, up 11% and 90%, respectively. Other fee income was spread pretty evenly among capital structuring, origination and administrative fees and credit funds, development leasing and acquisition fees in real estate and retail distribution revenues.
For the full year 2022, we generated $239.4 million of fee related performance revenues or FRPR compared to $137.9 million for the full year 2021. The strong contribution from FRPR in 2022, of which about 94% was recognized in the fourth quarter reflects $164.3 million in annually measured performance income from our two non-traded REITs and $71.5 million in performance income from nearly 30 perpetual life credit funds that are eligible for two silent fee payments.
As a reminder, the large increase in the non-traded REIT FRPR was partially driven by the fact, we received 100% of the FRPR in 2022 versus only 50% in 2021 as we closed the acquisition of Black Creek on July 1, 2021. Our underlying base of funds have generated FRPR continues to expand as AUM and these funds increased more than 35% to $22.4 billion during 2022.
Looking forward, the outlook for FRPR from our non-traded REITs is harder to predict compared to our credit funds. We think it’s reasonable to expect growth in FRPR in our credit funds in 2023 due to trajectory of interest rates as we anticipate earning higher base rates and fee income above fixed real rates. Our real estate funds will require some modest depreciation to meet our hurdle rates. And, therefore, the related future FRPR is harder to estimate.
As it relates to our FRE, our FRPR margin when considering the associated compensation expense was 37.6% in 2022. Our margin on FRPR should remain below 40% due to our contractual compensation structure of 60% paying to employees and some associated payroll taxes. While the lower margin on our FRPR negatively impacted our overall FRE margin in Q4, it was still very accretive to our FRE during the fourth quarter contributing $85 million to FRE with $64 million from real estate and $20 million from credit.
For the fourth quarter, FRE totaled $335.7 million, an increase of 33% from the fourth quarter of 2021, driven by higher management fees and FRPR. For the year ended December 31, 2022, FRE totaled $994.4 million, an increase of approximately 40% from the prior year. FRE accounted for more than 87% of our realized income, up from approximately 80% in 2021 and 74% in 2022.
Our FRE-rich earnings are a key differentiator for Ares and we believe they add consistency and predictability to our overall earnings. This can also be seen by our compound annual growth rate and FRE over the past three and five years of 42% and 36% respectively.
Our FRE margin for the fourth quarter totaled 39.9% and 40% for the full year. Excluding FRPR, which has a lower margin due to the compensation and related taxes that I previously mentioned, our margin was 40.6% for the fourth quarter and 40.2% for the full year. We continue to be on track to achieve our goal of 45% run rate FRE margin by year-end 2025, even including the margin drag from FRPR.
Regarding the pacing of our margin expansion towards our 45% target in 2025, we have now made many investments in front and back office personnel in preparation for the upcoming fundraising cycle.
The higher staffing levels dampened our margin expansion in 2022 and the full year effect of these hires will carry over into 2023. As we raised and deployed capital from these large commingled funds, coupled with an expected slowdown in headcount growth, we expect to see margin growth resume in the back half of 2023 with a larger step-up in 2024 and 2025.
Our realization activity increased in the fourth quarter, with realized net performance income totaling $91 million, an increase of 10% over the fourth quarter of 2021. Net performance income included $36 million from our credit group, largely from European waterfall distributions and incentive fees from our US and European direct lending funds. Our private equity group also realized $33 million of net performance income largely related to EU waterfall distributions from ASOF fund.
Realized income for the fourth quarter totaled a record $418 million, up 23% from the fourth quarter of 2021. For the full year, realized income exceeded $1.1 billion, a 28% increase from 2021. After-tax realized income per share of Class A common stock was $1.21 for the fourth quarter, up 42% versus the fourth quarter of 2021. For the full year 2022 after-tax realized income of $3.35 per share of Class A stock was up 30% versus 2021 and exceeded our 2022 dividend of $2.44 by 37%.
As of year-end, our AUM totaled $352 billion, compared to $341 billion for the third quarter and $306 billion as of year-end 2021. Our fee-paying AUM totaled $231.1 billion at year-end, an increase of 23% from year-end 2021. Our growth in fee-paying AUM was primarily driven by meaningful deployment across our US and EU direct lending special opportunities and alternative credit strategies, which pay management fees on invested capital.
Looking forward to 2023, we believe we are well positioned to take advantage of further volatility in the markets and continue growing our fee-paying AUM. Our available capital was $85 billion as of year-end, representing significant future earnings potential. We expect our dry powder will increase as we enter a period of accelerated fundraise.
As a reminder, we earn most of our management fees upon deployment since the majority of our funds earn fees on invested capital. As a result, the prior vintages of these funds do not generally have step-downs on their management fees. We ended the year with $41.8 billion of AUM, not yet paying fees available for future deployment, which represents over $400 million in incremental potential future management fees.
Our incentive eligible AUM increased by 11% from the end of 2021 to $204 billion. This amount $63.9 billion was un-invested at year-end. In the fourth quarter, our net accrued performance income stood at $832 million, a decline of $56 million from the previous quarter, due to $75 million of net realizations.
Of this, $832 million of net accrued performance income at year-end approximately 65% was in European style waterfall funds. For the full year, our net accrued performance income increased by 3% versus the prior year.
As we highlighted at our Investor Day, we have a substantially growing number of European style waterfall funds that accrued performance fees that pay the vast majority of their performance fees in the final years of the fund life.
For example, European waterfall style funds, totaled nearly $100 billion of incentive eligible AUM at year-end. In 2022, we realized $114 million in net performance income from European waterfall style funds, which represented 79% of the total net realized performance income for the year.
Importantly, we expect net performance income from European style funds to continue to account for the significant majority of our total net realized performance income in the years ahead. As we laid out at our Investor Day in 2021, we expect to see a continued increase in our European style funds as older release funds mature and enter harvest periods.
Last quarter, we stated we had approximately $300 million in European style funds that were past their investment period, and expected approximately $40 million to be recognized in the fourth quarter.
In the fourth quarter, we actually recognized $67 million of performance income from European style funds. Now at year-end, due to the interest generating nature of many of these accounts above their hurdle rates, we still have more than $300 million in European style funds past their investment periods.
We now expect net realized performance income from European style funds of approximately $100 million and $175 million in 2023 and 2024 respectively. Beyond 2024, we currently expect annual realized net performance income to continue to grow as some of our larger direct lending commingled funds raised over the past few years entered their harvest period.
As an update since our Investor Day of August 2021, the expected aggregate future net realized income from European waterfall funds raised through year-end 2022 has increased by approximately $1 billion to about $2.5 billion.
In terms of our American style funds monetizations will be market dependent and episodic, and depend on market conditions and other factors. We have approximately $250 million in accrued net performance income and American style funds past their investment periods.
For the full year in 2022, our effective tax rate on our realized income was approximately 9%, assuming all operating group units were exchanged fully into common shares. For 2023, we would expect a slightly higher effective tax rate ranging from 10% to 15% on a fully-exchanged basis, with the range depending on the level of realization.
As Mike touched on earlier, the growth in our AUM in part reflects our consistent long-term performance and 2022 was another strong year. In credit our US senior direct lending strategies generated gross returns of 1.9% for the quarter and 9.5% for the full year.
Our publicly-traded BDC Ares Capital just reported record fourth quarter core earnings and had another strong year, generating a net return of 1.9% for the fourth quarter and 7.1% for the full year. Our junior direct lending strategies generated a gross return of minus 0.8% for the quarter and positive 2.5% for the year, with much a decline related to market-based adjustments particularly impacting the fixed rate securities in those portfolios. Our European direct lending strategies generated gross returns of 2% for the quarter and 10.5% for the year.
All of these strategies have returned significantly in excess of the comparable liquid markets for the full year. Although, US real estate equity composite gross returns declined 6% for the quarter, but were up 11.3% for the year, and our European real estate equity funds gross returns declined 7% in the quarter, and declined 3.8% for the year, still significantly outperforming the public REIT indices.
Despite strong fundamentals in the industrial and multifamily sectors, market values have broadly declined as higher interest rates have weighed on discount rates and exit multiples. Within our non-traded REITs, AREIT generated a 0.3% net return for the fourth quarter and a 12.7% return for the year and AI REIT generated a net return of 0.1% for the fourth quarter and 26.8% for the year.
Our performance was supported by the strong rental growth and occupancy statistics that Mike referenced earlier. In private equity both of our strategies significantly outperformed the broader equity markets during the year. Our corporate private equity composite generated gross returns of 0.7% for the quarter and 4.3% for the full year. Our Special Opportunities Fund I generated a gross return of 3.9% for the quarter and 9.1% for the full year.
Our secondary strategy reports returns on a one-quarter lag basis. Private equity secondaries generated gross returns of minus 5.6% for the quarter and minus 4.9% for the year. Real estate secondaries generated gross returns of minus 1.8% for the quarter and a positive 20.3% for the full year.
At the beginning of the year, we look to set our quarterly dividend at a fixed level for the coming year. Based on the significant outperformance of our fee-related earnings relative to our dividends and our strong growth prospects, we’ve elected to increase our quarterly dividend to $0.77 per share of Class A and non-voting common stock, or $3.08 annual, a 26% increase from the $2.44 dividend per share in 2022, as Carl mentioned.
We believe this new dividend level is appropriate based on our current level of FRE and our growth prospects from our significant dry powder for deployment our flexible strategy and large fundraising pipeline.
Before I turn the call back to Mike, let me touch on our forward outlook. As you will recall, we gave the market long-term guidance for 2025 at our Investor Day in August of 2021, including a target of $500 billion and more in AUM a run rate FRE margin of 45%, FRE growth of 20% per year and growth in dividends per Class A share of 20% per year. Up to this point, I’m pleased to say we have meaningfully outperformed these expectations with over a 40% FRE CAGR from mid-2021 through the year-end 2022.
As FRPR was not contemplated in our Investor Day, 20% per year FRE growth rate guidance, we would like to clarify that we expect a 20% or more annual growth in our FRE from 2022 through 2025 excluding FRPR from our non-traded REITs. We do expect to generate attractive levels of FRPR on a growing base of eligible funds, but the growth rate is naturally harder to predict. We remain on track to meet or exceed the other elements of our Investor Day guidance.
I’ll now turn the call back over to Mike for his concluding remarks.
Michael Arougheti
Thanks, Jarrod. So we spent 2022 investing in talent and strengthening our front- and back-office teams to set us up for strong growth in the years ahead. We believe that we’re now in a position to capitalize on these investments with a large fundraising cycle, a strengthened capability to invest across a greater segment of the addressable market and an enhanced global platform.
Based on the foundation that’s already been laid, we have good visibility into the next several years of growth. In addition, we’re seeing strong synergies, earnings contributions and future earnings potential from our recent acquisitions that have us all very excited. Our ESG and DEI teams are executing at a higher level as we continue to focus on our impacted areas. Overall, our culture makes us a stronger workforce and better investors, as we strive to make a positive impact for our stakeholders and our communities.
As it relates to potential new acquisitions, our recent transactions filled specific product gaps in areas that we identified as high-growth opportunities. We now have a broader platform to build businesses organically. And as a result, the bar for new M&A activity is naturally higher. That said, we’ll continue to look for strategic add-on acquisitions and strong growth areas, where we can leverage our platform advantages and bring attractive investment products to our LPs.
Just this week, we agreed to purchase the remaining 20% of Ares SSG’s management business still owned by the original founders, with the closing subject to receipt of regulatory approvals. Our purchase of the remaining stake was contemplated in the original agreement but both parties mutually agreed to accelerate the timing.
In connection with this almost entirely all stock transaction, we’re planning to rebrand the business Ares Asia, and expect it will be our platform for continued growth in the Asia Pacific region.
I’m proud and grateful to the incredibly hard work and dedication of our team and for all that they do every day to deliver for all of our stakeholders also deeply appreciative of our investors’ continuing support for our company and I want to thank you for your time today.
And with that operator, I think we’re ready to open the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question today comes from the line of Craig Siegenthaler from Bank of America. Please go ahead. Your line is now open.
Craig Siegenthaler
Hey, Mike. I hope, everybody is doing well?
Michael Arougheti
All good here, Craig. Thanks.
Craig Siegenthaler
So with US banks building up reserves and getting ready for a recession, we wanted to get an update on how Ares’ private credit portfolio is prepared for a rise in corporate defaults. And also what have you seen in the fourth quarter in January in terms of early credit quality indicators across your portfolios?
Michael Arougheti
Sure. I think Kipp’s on, so I’ll give you my view but I think the good news is given the size of ARCC and the fact that they just announced, it’s a good indicator of the state of play within the existing portfolios and probably a broader proxy for what we’re seeing across the private credit portfolios here at Ares.
We announced that if you look at year-over-year EBITDA growth in that book and it was true for our European, it was about 9.1% LTM period-over-period. So while I think like many we’re seeing slower growth, there’s still good fundamental strength within that book.
Two and we’ve talked about this on prior calls, a lot of these private credit assets both corporate and real assets are sitting higher up the balance sheet than in prior cycles and are benefiting from a significantly higher amount of equity subordination than we saw in the last two credit downturns.
And so if you look at positioning in terms of loan to value, they’re generally speaking in and around 45% loan to value. And the reason I mention that is I think a lot of the impact from rising rates ultimately will be borne by the equity as the discount rate changes, valuation shifts and then there’s a value transfer from the equity to the debt.
Needless to say as we’ve seen base rates go up close to 500 basis points, it does put strain on interest coverage. Interest coverage in the portfolios though given the low starting point is still at levels that make us comfortable and are consistent with where prior cycles were.
So what makes us so unique Craig is we’re seeing strong fundamental performance and the conversation about defaults right now is actually happening at a time when rates are going up. And earnings are not necessarily slowing, whereas, in prior cycles we’ve seen rates going down and earnings beginning to slow at a much faster pace.
So from the private credit perspective, it’s a really interesting situation because we’re accumulating significant excess return ahead of a conversation about any potential defaults.
To that point, I still believe that while we will see an increase in amendment activity and default activity, it should largely be beneficial to total return. And to put that in perspective if you look at where ARCC’s non-accrual rates stood at the end of the year, they’re about 1.7% on fair value, which is well-below historical averages. So pretty unique position in terms of performance, a lot of liquidity and dry powder on the platform to both defend existing exposures and play offense if need be, but I think a pretty interesting vintage across the Board for private credit.
Kipp, I covered a lot there. I don’t know if you wanted to add?
Kipp deVeer
I think you got most of it, Mike. Craig, the only other thing that we said on this call for the BDC yesterday was that we did see some modest increases in amendment activity through the fourth quarter and into the first and I’d expect that will continue throughout the year, but it’s not a huge cause for concern from our standpoint.
Craig Siegenthaler
Thank you, Mike, Kipp for the comprehensive response there. Just as my follow-up, I know Ares likes to be opportunistic in recessions. And I think we’ll always remember the ARCC acquisition of Allied in the financial crisis. But how should we think about opportunistic M&A at the holdco level? And then also at the BDC level, should a recession here transpire?
Michael Arougheti
Yeah. Look I think we have a lot of experience being opportunistic on corporate M&A at the parent company within the publicly traded subsidiaries and within our portfolio. It’s core to who we are as investors and managers. I would expect that those opportunities will present themselves given how liquidity constrained certain parts of the market are and certain competitors are. It’s still a little early for that Craig, but needless to say to the extent that there are opportunistic chances for us to either acquire portfolios of assets or businesses at attractive entry points you should expect that we’ll do
Craig Siegenthaler
Thank you, Mike.
Operator
Thank you. The next question today comes from the line of Alex Blostein from Goldman Sachs. Please go ahead, your line is now open.
Alex Blostein
Hi, good morning everybody or good afternoon. Thanks for the question. I was hoping we could start maybe with a question around Mike just kind of getting your pulse on opportunities for credit deployment. When we look at the fourth quarter you seem to have been very active in what was generally I think a fairly slow environment for new deal activity. So, maybe expand a little bit where you guys were more active.
And more importantly looking into kind of what you’re seeing so far in 2023 areas where you expect to be a little more active and a little less active in how active are the banks. So I’m assuming not a lot of activity from the banks. But are they starting to come back to the market a little bit more given the fact that the market backdrop has gotten a little bit more constructive?
Michael Arougheti
Yes. Thanks for the question Alex. So, interesting we noted this in the prepared remarks, I was pleased to see that when we totaled everything up after what was a challenging year for markets generally that our deployment was right on par with what it was in 2021 and 2021 was obviously a different market backdrop just in terms of velocity of capital and transaction activity.
And I think that that speaks to the breadth of the platform by geography, by asset class and it speaks to the ability of most of our funds to pivot opportunistically between liquid and illiquid markets and move around the balance sheet when the markets are transitioning.
So, if you were to drill down into where the capital is being put to work, there was obviously a slight mix shift towards public markets as we were seeing. And we’ve talked about this before opportunities emerge in the public markets that were frankly more attractive than what we were self-originating in the private markets.
As those markets start to come more in line with one another we were able to start to be more opportunistic on the private side of the house as well and that continues. So, look even in markets where you have lower transaction volumes given the competitive dynamic today, meaning challenged access to the public equity market challenged access in the loan and high-yield markets, lower bank liquidity, private market solutions are pretty important. Right now is the marginal liquidity provider. So, we’re finding ample things to do irrespective of a lower M&A environment.
When you look at ultimately pipeline development, I think we’re not going to see M&A volumes at least in the private markets pick up to where they were until we all agree that we stabilized from a rate perspective.
So, my own personal perspective as we get towards the end of the year and everyone has a general consensus view that the hiking cycle is over, I would expect that there’s a fair amount of pent-up demand and we’ll see the M&A machine turn back on.
I’d also highlight obviously places like special opportunities where we closed our second fund last year has been, very active. Places like alternative credit, very active. Opportunistic real estate debt and equity, very active. So, a little bit of a mix shift but still really, really exciting investment opportunity.
Alex Blostein
Great. Thanks for that. My second question Jarrod probably for you. I wanted to drill down a little bit into the 26% dividend growth that you announced this morning. Obviously, supported by a very robust outlook you guys have for fee-related earnings et cetera and all the things that sort of discussed already on the call.
But is that a way of effectively seeing hey look FRE growth could be north of that and that’s sort of what informs your confidence around raising it by as much, or do you partially incorporate the fact that European style waterfall contribution will continue to rise and those are FREs almost cash flows and that kind of what gives you confidence in going above the typical dividend increase that we’ve seen in the past? Thanks.
Jarrod Phillips
Thanks Alex. Look, it’s a number of those factors all wrapped into one. First is, yes, we have a lot of conviction on our FRE growth as I mentioned in the script. We reiterated our guidance at the 20% per year growth. That’s ex the FRPR are related to the REIT, because that’s a little bit more difficult to predict. So we know that we have that strength.
We also just came off of a very strong year where we easily covered the dividend for the year based on our FRE growth. And then, going into next year, as you mentioned, we continue to see a nice pipeline of the European style waterfalls coming in. So when you mix all those factors together we have a high degree of confidence that that’s the appropriate dividend level for the year.
Alex Blostein
Great. Thank you, both.
Operator
Thank you.
Jarrod Phillips
Thanks, Alex.
Operator
The next question today comes from the line of Benjamin Budish from Barclays. Please, go ahead. Your line is now open.
Benjamin Budish
Hey, guys. Thanks so much for taking my questions. I wanted to follow up on something Mike you said at the very beginning of the call. You said investors generally remain under-allocated to all with a little under 10% of global AUM. I’m just curious, how are your institutional clients sort of thinking about their allocations?
I mean we’ve heard a lot from some of your peers about the denominator effect in private equity. Do they tend to think about credit separately? Is there a lot more room to run in private credit in particular? I’m just kind of curious how you’re thinking about that.
Michael Arougheti
Yes. I think, the good news is we’re in market and have been in market, with good success with private credit, private equity and real assets funds. I would say, generally speaking, denominator effect is impacting, what I would call, regular way private equity strategies or growth equity the most. You also have a little bit of a numerator effect in the sense that private valuations are lagging public comps and so, I think, it’s hitting both sides of that equation.
Our private equity business is, obviously, positioned a little bit differently with SOF able to invest around the balance sheet in distressed and transitioning companies in industries. And our core buyout franchise, as I mentioned in the prepared remarks, having the ability to invest in distressed for control in addition to traditional growth buyouts, which we think is a pretty unique setup.
For private credit and there was an interesting article in the paper a couple of weeks ago, just talking about pension allocations, as an example, being just shy of 4% of allocations with a general commitment to see that doubling. And I would say that, that’s probably true for most of the other institutional investor segments as well. So we are not seeing any reduced demand for private credit. And in many cases, we’re actually seeing appetite increase. And I think the increased reflection, to your question, that people are going into the cycle under-allocated.
Number two, it’s easier to deploy in credit in a market like this and so, for folks who are looking to capture excess return in this vintage credit is an easier way to put money in the ground. And three, just to put it in perspective, if you look at, generally speaking, performing first lien senior secured credit across the private credit landscape, you’re generating 10% to 13% rates of return, short duration floating rate.
That’s a really compelling place to be on a relative value basis, but it actually is liquidity-enhancing, because a lot of these institutional investors, whether they’re pension funds or endowments or insurance companies are probably trying to beat a bogey of 6% on the low end and 8% on the high end.
So if you’re generating current short duration floating at 10 plus with rates still on the rise everything in excess of your hurdle is actually helping to refill the bucket of return that you gave up in your fixed income and equity book. So there’s a lot at play here driving dollars into the private credit landscape and I would expect that to continue.
Benjamin Budish
Great. That’s really helpful. Maybe one quick follow-up. You mentioned the — you acquired the rest of the Asia business. It’s a smaller part of the whole. But could you kind of give us an update on the strategy there? What sort of contribution to growth are you expecting from there over the next several years?
Michael Arougheti
Sure. Just to clarify we signed, but we’re still waiting for regulatory approval. We decided to pull it forward really as an indication of the opportunity that we see there and just felt that by owning 100% versus 80% would give us just a better opportunity to align incentives along a shared vision for growth and really drive growth across the region under the unified Ares brand.
So we’re super excited about it. And this acceleration I think is a good indication of what we would see there. If you look at the businesses that exist today the legacy SSG businesses we bought was a leader in private credit in two fund families one being a distressed and special sits business, and the other being a more regular way senior lending business. And both of those families of funds have performed well and grown in our two years of ownership.
We’ve been adding people and capabilities across the region. We’ve talked about on prior calls that we had a successful launch and closing of an Australian-New Zealand direct lending business. We have added senior folks in and around our real estate and infrastructure business. We’ve added secondaries professionals and raised capital to expand our secondaries business there.
So I would say at a high level while a lot of those markets are still developing and don’t necessarily offer the same scale of opportunity or breadth of opportunity that the U.S. and Europe do our vision for our APAC business is that at maturity it will be of a similar size as the US and European markets and all of our strategies will be represented there in each of the markets in the region.
So it’s going to take us a while to build that. And we’re going to obviously need to see the markets mature and evolve from a capital formation and regulatory standpoint, but that’s the vision. I think from a growth standpoint the good news is that they have been growing at a similar pace to the rest of the platform obviously off of a smaller base, but enjoying good growth and we’d expect that to continue.
Benjamin Budish
Hey, great. Thanks so much.
Operator
Thank you. The next question today comes from the line of Michael Cyprys from Morgan Stanley. Please go ahead. Your line is now open.
Michael Cyprys
Hi. Good morning. Thanks for taking my question. I wanted to circle back to some of the comments you made earlier about investments that you’ve been making in the platform over the past couple of years. I was hoping you could maybe elaborate on kind of where we are at this point. What’s left in terms of the build-out? And then how we should think about that translating in terms of G&A and comp growth compared to the double-digit growth you guys put up here in 2022? How we should be thinking about that into 2023? Thank you.
Jarrod Phillips
Thanks, Mike. That one is…
Michael Arougheti
Jarrod, you want to speak to that one?
Jarrod Phillips
Yeah. Yeah. Sure. Thanks, Mike. The first thing, I’d say is that, as we went into 2022, we did talk a little bit about how that was really a year of growth of the platform and integration across the platform. That resulted in about 450 net new hires on the platform through the year. Now as that happens throughout the year, you do have that headwind coming into 2023 of those 450 hires being paid for the full year.
We still certainly expect to be hiring a little bit throughout this year, but likely not at the same pace that we’ve seen in the prior year, as we’ve integrated those folks brought them in and really need to assess and evaluate the capabilities and get our fundraising off the ground.
So once that fundraising then is completed and we deploy it as you look into the back half of 2023, and into 2024 and 2025, what you’ll start to see is that’s when you’ll see more significant margin expansion. So as we kind of guided at the beginning of last year, we thought that we would have a very moderate margin expansion in 2022.
I’d say that, it still won’t be at the pacing that maybe we had stated back in 2019, 2020 and 2023 because of the headwinds that we received from that full year of hiring. And then as we deploy, capital from this fundraising cycle into 2024 and 2025 that’s when you’ll see that margin expansion really accelerate towards that 45% plus that we talked about.
Michael Cyprys
Great. Thanks for that. And just – I’m sorry.
Jarrod Phillips
Yeah, I was saying, because you asked about G&A as well. So, about half of our G&A is headcount-related. So you see a very close correlation to G&A growth, as headcount grows. The other half is a little bit more episodic in terms of what events are occurring at what times, or where capital is needed across the platform in terms of investment. So when you’re thinking about G&A, there is a pretty strong tie to our comp levels.
Michael Cyprys
Great. Thanks for all the color there. And just a follow-up question on the European style funds and the performance fees that you expect. So we hear you on the $100 million and $175 million in 2023 and 2024. So I guess, what’s required in order for those fees to come through? I imagine most of these are credit funds, so it’s just the loans maturing in the portfolio and then those performance fees get crystallized upon maturity of the loans as opposed to selling an asset like a PE fund. Maybe you could just remind us on that? And then just, how do you think about the potential for variability either upside or downside to that guidance? The macro environment say is more challenging in every recession or off to the races in its new cycle? Thank you.
Jarrod Phillips
Sure. When you thinking about – think the portfolio you’re thinking about exactly right that, the credit funds that are within there are much less episodic in nature. They are based on the duration of the underlying assets. Generally, those assets don’t make it to the end of their life before they are refinanced. So that’s what drives a lot of the payments within that balance and that’s what makes it a lot more predictable.
As those loans today yield above the hurdle rates, you’re consistently building those amounts that you have on accrual. And as interest rates rise, as it’s predominantly a floating rate portfolio, you do see the benefit of that. Now, there is a difference between the amount you’ll actually realize in what’s currently accrued today, what’s currently accrued today does have some of the variability related to unrealized gain loss, which as you know as these loans mature they will mature at par and that full yield will come in.
So there’s a slight benefit that you get from that aspect of it. There’s also a benefit that you’ll get in future years that’s not modeled into an accrued balance today of that increase in interest rate. So that’s why you couldn’t have a difference between what we’ve accrued on our books, and what we believe that we will recognize over that several year time period. We do believe that these balances are more predictable because of their credit nature. Now that being said, there are some private equity style funds in there that are from our Special Opportunities group and from our real estate group their European style, and are still more episodic as they get to the end of their life. But we generally know that those are later in their lives and we’re starting to see monetizations come through on those already. So – but you’re exactly right to think of it in terms of being credit-driven and therefore being more predictable in nature as well as there are benefits that we see in that portfolio from rising interest rates.
Michael Cyprys
Great. Very helpful. Thank you.
Operator
Thank you. The next question today comes from the line of Gerry O’Hara from Jefferies. Please go ahead. Your line is now open.
Gerry O’Hara
Thanks and good afternoon. Just thematically, I think renewables and energy transition are a couple of topics that we’re kind of increasingly hearing about and I guess cited as high-growth opportunities. So Mike, would be interested to kind of get your thoughts on how Ares is thinking about these end markets perhaps what you’re hearing from client demand or sort of positioning from a portfolio or solution set.
Michael Arougheti
Yes. Thanks for the question. I think you’re spot on that energy transition and climate infrastructure are increasingly important topics across the landscape. I think the good news is we were early in identifying that transition as an opportunity. So as a reminder in our fifth infrastructure fund here which goes back now 2.5 vintages, we pivoted from more traditional energy infrastructure into renewables and renewable energy. And now in the rearview mirror when you look at that fund, about 60% of our deployment in that fifth fund wound up being in the energy transition and renewable power with appropriately high returns relative to traditional power players.
That set us up to launch our first climate infrastructure fund, a couple of years ago. Candidly the fundraise took longer than I would have expected because I think we were a little early in recognizing the long-term secular trend there. Good news is it was well raised and well invested and we are now in the market with our second climate infrastructure fund and are actively raising that. And while it’s not closed yet, I think given some of the demand for exposure to energy transition, we have confidence that it will be.
Obviously, there’s a lot of positive catalyst, particularly in the US market on the heels of the Inflation Reduction Act. That’s also helping to bolster investor demand. Two, as we talked about in the prepared remarks, we obviously made the acquisition of the AMP infrastructure lending business. That team and fund family has been fully-integrated into the platform.
We had a successful close on IDF V at $5 billion. Last year that fund is well deployed. And while it invest broadly across the infrastructure spectrum, not surprisingly they too were benefiting from the increase in appetite for in transaction activity within energy transition.
And then probably most recently, which we’re super excited about is the announcement that we made out of our SPAC Ares Acquisition Corp., where we are entering into a transaction to merge with Ex Energy, which is a fourth generation small modular nuclear reactor business, which we think is really at the forefront and cutting edge of the future of the energy transition. So we’re very focused on it. We have multiple products and avenues to invest behind it, and I would think that with continued good performance that that’s going to continue to be a good growth area for us.
Gerry O’Hara
Great. Thanks for the reminder and update. That’s it for me. Appreciate it.
Michael Arougheti
Thanks Gerry.
Operator
Thank you. The next question today comes from the line of Patrick Davitt from Autonomous Research. Please go ahead. Your line is now open.
Patrick Davitt
Good afternoon, everyone. Thanks. Most have been asked. Maybe could you speak a little bit how the wealth management flow experience has evolved since quarter end and if you’re seeing any meaningful impact of the press noise, obviously, in that channel kind of late in the quarter?
Michael Arougheti
Yeah. So the good news is these numbers get publicly released so you guys will be able to see how we’re doing. I think the good news from our perspective is that we’ve been having a different experience than some of the larger peers. If you look at our wealth management platform right now, we have obviously our two non-traded REITs AI REIT and AREIT. We have our interval fund. We have our recently launched private markets fund and as we talked about our recently formed non-traded BDC. And if you look across all four, we’ve actually had positive flows.
So to put that in perspective, if you look at inflows into the non-traded REITs, Q4 inflows were about $430 million against outflows about $157 million, so a healthy cushion. Just to contextualize it that $430 million was down from a little over $840 in Q3. So not surprisingly given, I think some of the noise in the channel but also just some of the market reaction to transitions in the real estate business. We’ve seen slower inflows, but we haven’t seen a disproportionate amount of outflows and that’s generally been the case throughout the course of the year.
Going into 2023, still too early. But again as we mentioned in the prepared remarks, while our two REITs are quite substantial, aggregating about $13.5 billion in the aggregate, we’re just growing off of a smaller base. That puts us in a position where we can continue to add distribution partners. And as I mentioned in our prepared remarks, we fully expect that we’ll be adding two new wirehouse partners for those products in the first half of this year. So some of the headwinds we’re able to grow through just as we’re adding new distribution relationships. And then we do have some unique elements to our business in terms of how we invest, but probably most importantly is we have a 1031 exchange program that feeds into both of our REITs that just promotes a stickier investor base if you will. So it’s something we’re watching closely. We are not slowing our investments in the channel. We’re still very long-term believers in the growth in that market. And at least as we’re experiencing it we’ve seen a modest slowdown in inflows, but we’re not seeing net outflows.
Patrick Davitt
Great. That’s all I have got. Thank you.
Operator
The next question today comes from the line of Adam Beatty from UBS. Please go ahead. Your line is now open.
Adam Beatty
Hi. Thank you. Good afternoon. Just wanted to get an update on the secondaries business. I think last quarter there was a little bit of rebranding maybe some trunk A fundraising. Seems like an opportune time to be out in the market with something like that so I just wanted to get maybe some outlook on when you might be back in the market what kind of funds and maybe how — what kind of magnitude we’re looking at? Thank you.
Michael Arougheti
Sure. So the update is you’re right. We have fully integrated what was the landmark platform. We’re very pleased with the way that the integration has grown. We have added a significant number of new people across the platform here in the US and Europe and as I mentioned earlier in Asia Pacific.
What we have tried to build just to leverage the strengths that we have within the GP and LP community is kind of a broader set of secondary solutions across the different verticals. We have added a credit secondaries business, which we think really plays to the strength that we have in private credit. We have spun up our team and are actively raising capital there something we’re super excited about.
We are in the market with our next generation of infrastructure secondaries, which is a big growth area for us. We are currently in the market with our ninth real estate fund, which was a fund that was ready to launch when we acquired. And we did to your point close out our prior vintage of private equity, and we’ll be coming back into the market at some point with kind of the Ares version of what that strategy is going to be going forward.
We’re also excited that we’re able to leverage the momentum we have in the wealth management channel to launch the public markets fund, which is largely anchored by our secondaries capability. We’re seeing good scaling there and we would expect that to continue to grow.
So the business has been fully-integrated. I think, we’ve repositioned certain of the strategies into higher growth parts of the market. We’ve opened up growth opportunities in credit and Asia and Infra in a way that didn’t exist prior to the acquisition and now we’re executing. So we’ll keep everybody abreast of the progress there but a lot to be excited about.
Adam Beatty
Excellent. Thank you. And then just maybe a quick one on the performance of the real estate strategies in the quarter. Obviously the full year was quite good. The underlying fundamentals the lease re-ups that Mike talked about seem very good. But in the quarter maybe a little bit more of a negative mark than some might have expected. So just want to get a sense if there’s any time lag or other dynamics that played through there and anything that might be ahead for 1Q? Thank you.
Michael Arougheti
Yes. Look there’s — needless to say when you just think about real estate the impact of rising rates you have to just think about how interest rate increases correlate to changes in the cap rate and valuation environment and how increased rate challenges certain property sectors from a from a debt service standpoint. I think to your comment we are fortunate that close to 80% of our exposures are in multifamily and industrial and the fundamentals there have been very strong.
And so even in a world where valuations may be coming in you’re growing through them with an installed base of tenants that is continuing to drive pretty strong NOI at the property level. And I think that’s kind of the way to think about it which is not all real estate is created equal. We’re in gateway markets with great assets that are all performing really well.
In terms of Q4 versus rest of the year, I would only read into that just the math of rates and not any kind of fundamental deterioration in performance. Because as you mentioned when you go drill down in terms of our re-up and re-leasing occupancy rates and what we’re able to command given the assets we own the fundamental strength in the portfolio we think is pretty clear.
I do think for what it’s worth that the real estate markets are going to be one of the more challenging parts of the private market landscape. It’s one of the reasons why we’re so focused right now on our opportunistic real estate franchises just to make sure that we’re appropriately capitalized to take advantage of the distress that should roll through certain parts of that market as rates continue to go up here.
Adam Beatty
Got it. Make sense. Thanks very much, Mike.
Michael Arougheti
Sure. Thank you.
Operator
Thank you. There are no additional questions waiting at this time. So I’d like to pass the conference call back over to Michael for any closing remarks. Please go ahead.
Michael Arougheti
No we don’t have any. We thank everybody for their time. Sorry, if we went a little late but we appreciate everybody tuning in and for the support and we look forward to giving everybody the update next quarter. Thank you.
Operator
This concludes today’s conference call. Thank you all for your participation. You may disconnect your lines.
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