Q1 2023 Ares Management Corp Earnings Call

Participants

Carl G. Drake; Partner, Head of Public Markets IR & Corporate Communications; Ares Management Corporation

Jarrod Morgan Phillips; Partner & CFO; Ares Management Corporation

Michael J. Arougheti; Co-Founder, CEO, President & Director; Ares Management Corporation

William Stephen Benjamin; Partner & Head of the Ares Real Estate Group; Ares Management Corporation

Alexander Blostein; Lead Capital Markets Analyst; Goldman Sachs Group, Inc., Research Division

Benjamin Elliot Budish; Research Analyst; Barclays Bank PLC, Research Division

Brian J. Mckenna; VP & Equity Research Analyst; JMP Securities LLC, Research Division

Craig William Siegenthaler; MD and Head of the North American Asset Managers, Brokers & Exchanges Team; BofA Securities, Research Division

Kenneth S. Lee; VP of Equity Research; RBC Capital Markets, Research Division

Michael C. Brown; MD; Keefe, Bruyette, & Woods, Inc., Research Division

Michael J. Cyprys; Executive Director and Senior Research Analyst; Morgan Stanley, Research Division

Rufus Hone; Asset Managers Analyst; BMO Capital Markets Equity Research

Unidentified Analyst

Presentation

Operator

Welcome to Ares Management Corporation's First Quarter Earnings Conference Call. (Operator Instructions). As a reminder, this conference is being recorded on Friday, April 28, 2023. I will now turn the call over to Carl Drake, Head of Public Markets Investor Relations for Ares Management. Please go ahead, sir.

Carl G. Drake

Good morning, and thank you for joining us today for our first quarter 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 the Q&A session.
Before we begin, I want to remind you that comments made during this call contain forward-looking statements and are subject to risks and uncertainties, including those identified in our Risk Factors in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results, and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Ares Fund.
During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our first quarter earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures. Note, we plan to file our Form 10-Q early next month.
This morning, we announced we declared our second quarter common dividend of $0.77 per share on the company's Class A and nonvoting common stock, representing an increase of 26% of our dividend for the same quarter a year ago. The dividend will be paid on June 30, 2023, to holders of record on June 16.
Now I'll turn the call over to Michael Arougheti, who will start with some quarterly financial and business highlights.

Michael J. Arougheti

Thanks, Carl. Good morning, everyone. I hope everybody is doing well. Following a volatile 2022 in the equity and debt markets, transaction activity in the first quarter got off to a slow start and was uneven across various markets that we participate in. We began to see some signs of falling as the quarter progressed, but the dislocation in the banking sector late in the quarter created considerable uncertainty about the banking system; the economy; and ultimately, the path of interest rates.
Fortunately, for Ares, our asset-light business model tends to insulate us from balance sheet-driven volatility, and our long-term investment capital enables us to be opportunistic when other market participants retrench. For the first quarter, our business metrics continued to show strong year-over-year growth, and we're on track for a more significant fundraising year, with 7 of our largest commingled funds expected in the market this year. In the first quarter, we raised $16 billion in new fund commitments and ended the quarter with $360 billion of AUM. We also generated strong year-over-year growth of 25% in management fees and 24% in fee-related earnings, while delivering a strong quarter of fund performance for our investors.
Our first quarter realization activity was seasonally light, but our net accrued performance receivable continues to build. And we remain on track with our original European waterfall net realized performance income guidance for this year and next year, as Jarrod will discuss later.
We continue to see robust investor demand for our alternative private capital offerings. In the market, we're observing a flight to larger, higher quality managers as investors are consolidating their allocations with preferred managers. Many of our largest funds with [first] closes are seeing significant commitments that represent half or more of the targeted fund size and the pipelines of investors working toward closing is encouraging. We also benefit from having a high re-up and crossover rate from existing investors. For the first quarter, over 90% of our $14 billion in direct capital raised was from existing Ares investors.
As we outlined last quarter, we're actively raising our sixth European Direct Lending fund and our second alternative credit fund. For our sixth European Direct Lending fund, we've seen robust demand from investors and have accepted to date, and anticipate through early Q2, subscriptions that will bring the total first close to more than $8.5 billion of LTV commitments. This amount includes subscriptions of $4.7 billion accepted through the end of the first quarter. We continue to see strong fundraising momentum for this fund and anticipate that at final close, the fund will exceed the predecessor fund, which had EUR 11 billion of LP commitments and EUR 15 billion in total capital, including fund leverage.
Our second alternative credit fund is also seeing significant demand. As a reminder, our alternative credit strategy deploys flexible capital focused on large, diversified portfolios of assets that generate contractual cash flows. We've accepted subscriptions to date and anticipate, through May, a total first close of approximately $3.5 billion. This includes $1.8 billion of commitments closed through the end of the first quarter. With the robust demand for this fund, we expect commitments to this fund to easily exceed that of its predecessor, which totaled $3.7 billion. And we're targeting a final close later this year.
This fund, like its predecessor fund, carries a unique charitable endeavor tied to our performance fees, where 10% of the carried interest for closed-end funds and 5% of the incentive fee for the open-end fund will be donated to support global health and education initiatives. These contributions are split equally between our investment team and Ares.
Inclusive of the fund's first closing, the alternative credit platform will have over $10.5 billion of capital designated with this charitable tie-in. And based upon performance to date, our predecessor alternative credit funds have already reached approximately $10 million for potential charitable donations.
In our secondaries business, we entered into a credit secondaries joint venture with a large strategic investor with initial capital of approximately $1 billion. We believe that this well positions us to be a market leader in the growing credit secondary sector, particularly due to our leading private credit franchise, knowledge, insights and relationships with middle-market companies and sponsors. We intend to further scale our presence in this new strategy with the recent launch of our first credit secondaries commingled fund, with the first close expected later this year. This is another great example of the types of product extensions and growth that we can bring to acquired platforms shortly after acquisition.
With respect to our other fundraisers, we're on track to hold a sizable first closing for our third U.S. senior direct lending fund, either late Q2 or early Q3. As a reminder, our second fund had $8 billion in LP commitments and approximately $14 billion in total capital, including fund leverage. We also anticipate first closes for our second climate infrastructure fund, our third infrastructure secondaries fund and our seventh corporate private equity fund over the next several quarters.
Later this year, we expect to launch our third U.S. junior capital direct lending fund, with the first closing expected early next year. And overall, we expect to have nearly 30 different commingled and perpetual capital fund offerings in the market this year in addition to our managed accounts and CLOs.
Finally, last week, we priced the IPO of our second SPAC, Ares Acquisition Corp. II. We saw significant demand for the offering, with the $400 million base deal upsized to $450 million. The underwriters partially exercised their over-allotment option to get to a final close of $500 million. At the end of the closing, AAC was the second largest U.S. IPO this year and the largest SPAC IPO since January of 2022. And we believe that this is a strong validation of our differentiated platform and approach to this asset class.
With our strong initial investor demand and robust fundraising pipeline, we're already seeing a rebuilding of our shadow AUM, which increased from $42 billion at year-end to over $50 billion at quarter end. With our positive outlook for continued fundraising strength in the coming quarters, we expect to see further increases in our available capital, enabling us to be more opportunistic with our deployment in what we believe is an attractive investment environment.
In the wealth management channel, we're excited to announce that we've recently launched our nontraded BDC, Ares Strategic Income Fund, or ASIF. We also remain on track to continue adding distribution partners for our U.S. products, and we're expanding our retail distribution and products globally, including planned dedicated vehicles targeting the European and Asian regions later this year to take advantage of our credit expertise.
While we, like others, continue to experience slower flows into our 2 nontraded REITs, unlike others, our net inflows remained positive in the first quarter with a combined approximately $350 million of gross quarterly proceeds, inclusive of our 1031 Exchange program versus approximately $200 million of quarterly redemption requests. We believe that success in the retail market will ultimately gravitate to a handful of all players that have attractive products across all the private asset classes, a global presence and large distribution and service teams who can provide education and thought leadership to financial advisers and their clients.
With our continued expansion in products and distribution and the launch of our retail education portal, Access Ares, in June, we believe that we're cementing Ares as one of the leaders in the alternative retail market.
From a deployment perspective, the first quarter was, as expected, slower across many of our strategies due to typical seasonal factors and decreased market activity. That said, the $12.9 billion of gross deployment in the quarter was in line with our internal expectations at the beginning of the year, and we remain on track with our growth objectives for fee-paying AUM for the year. We believe that our private credit strategies are taking market share in a smaller pool of transaction opportunities. And we expect that this will pay dividends as more issuers and sponsors experience the benefit and reliability of our flexible capital solutions.
Our pipelines are building in our more opportunistic strategies that often see higher deployment in dislocated markets. In alternative credit, the investment pipeline is very strong, as our team is seeing numerous opportunities out of the regional banks, including asset portfolio sales and regulatory capital trades, in addition to their normal pipeline of asset-backed transactions.
In our Private Equity Group, our special opportunities team has seen a significant pickup in their pipeline as banks and other traditional providers retreat from the market. We're seeing a growing number of opportunities from companies that need solutions as they struggle to amend and extend their capital structures.
In real estate, we're starting to see compelling opportunities from fund complexes that need liquidity to meet redemption requests. The most interesting opportunities currently in the pipeline are in the debt markets, where we can step into the funding gap for refinancing opportunities and provide fresh capital on a structured basis.
In Direct Lending, we're beginning to see more deal activity and some larger transaction opportunities, which should set us up for an increase in deployment in the second quarter. The expected investment returns for this vintage of private credit are attractive with meaningfully improved terms, more conservative capital structures, higher base rates and significant excess credit spreads.
In our secondaries business, we're seeing a growing number of both LP- and GP-led opportunities as certain LPs seek liquidity and certain fund sponsors look to accelerate liquidity into legacy fund vehicles.
So overall, we have many strategies that can take advantage of constrained liquidity in the market. With $88.6 billion of available capital and additional closes for several of 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. This is also a very attractive environment for our affiliated insurance platform to be building its annuity origination business.
We now have over $7.5 billion of AUM at Aspida, and over 95% of the portfolio is protected from surrender charges and without the issues associated with a large legacy book. Going forward, we expect to continue to raise third-party capital to further scale our affiliated insurance platform. We believe the strong secular growth that we continue to experience across our business is ultimately result of our strong and consistent fund performance.
Our funds portfolios are generally continuing to see cash flow growth with positive fundamentals. Despite higher interest rates flowing through to our portfolio companies, we continue to see solid cash flow growth, low defaults and resilience in our credit metrics.
For example, our U.S. and European direct lending portfolios continue to see mid- to high single-digit year-over-year EBITDA growth. In Direct Lending, our loan-to-value statistics remained steady between 43% and 50% for the U.S. and Europe. At Ares Capital Corporation, which is a good proxy for our U.S. Direct Lending business, nonaccruals totaled 2.3% of the portfolio at cost and 1.3% at fair value, which continue to be below our 15-year historical averages. These credit metrics remain at benign levels despite the significant increase in base rates. As a result, our Direct Lending funds have experienced a significant increase in coupons with a de minimis offset from credit-related issues.
Our global real estate portfolio continues to see strong but moderating rental growth and high occupancy rates. Our highest conviction sectors of industrial and multifamily account for more than 75% of the portfolio's gross assets, with another 12% invested in our favored alternative sectors, including self-storage, triple net lease and single-family rental.
In Industrial, on a same-store comparable basis, we saw rent growth of approximately 70% over the last 12 months and more than 90% tenant retention across our industrial portfolio. In multifamily, our same-store re-leasing spreads continue to see 10%-or-better annual growth over the last 12 months. From an allocation standpoint, we continue to be meaningfully underweight to office, retail and hospitality assets. Our U.S. office equity exposure is only 2% of our global real estate portfolio.
And lastly, in our Private Equity Group, our corporate PE portfolio continues to perform well as year-over-year EBITDA increased 10%, including growth supported by accretive acquisitions and synergies.
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 Morgan Phillips

Thanks, Mike. Hello, everyone, and thank you for joining us today. As Mike stated, we once again experienced strong growth in our financial metrics, including management fees, fee-related earnings, realized income, AUM and FPAUM compared to the first quarter of 2022. Our management fee-centric and FRE-rich business model continued to deliver strong results despite the significant market volatility in the first quarter, stemming from rising interest rates, continued geopolitical uncertainty and the challenges in the banking sector.
In addition, the sizable amount of capital that we've raised year-to-date has strengthened our available capital position and sets us up for greater deployment-driven growth in our FRE and margin expansion during the second half of this year.
Starting with revenues. Our management fees totaled over $600 million in the quarter, an increase of 25% compared to the same period last year, primarily driven by deployment of our available capital. Other fee income of approximately $20 million was largely in line with the first quarter of 2022.
FRE totaled $255 million, an increase of 24% from the first quarter of 2022, driven by higher management fees from deployment over the last 12 months. In a market environment that continues to be characterized by volatility and lower transaction volume, our ability to grow through management fees and FRE is a significant differentiator for Ares.
Our FRE margin for the first quarter totaled 40.6%, roughly a 70 basis point improvement from the 39.9% in the fourth quarter, but in line with the 40.6% margin from the fourth quarter, excluding the large impact from FRPR. As we stated on last quarter's call, we expect to see margin growth resume in the second half of 2023, with a larger step-up in 2024 and 2025 as we absorb the impact of our historical hiring and deploy the significant capital that we have raised and will continue to raise over the next several quarters. As such, we continue to be on track to achieve our goal of a 45% run rate FRE margin by year-end 2025.
Our realization activity was limited in the first quarter, with net realized performance income of over $7 million, as equity market volatility and significantly lower transaction volume reduced monetization opportunities. We are optimistic that once the market has clarity around peak Fed funds rate and the direction of the economy, we could see an increased monetization opportunity. Despite limited European waterfall realized income in the first quarter, we continue to remain on track for the $100 million we expect in 2023, which is largely derived from credit and credit-light funds.
For 2023, we currently have visibility on at least $20 million of European waterfall net realized performance income in Q2, with the remainder likely coming from tax distribution-related payments from our funds in the fourth quarter. Generally, we expect 60% to 80% of these types of distributions to be recorded in the fourth quarter and then most of the remaining distribution to occur in the second quarter, once the [backed] payments are finalized. We do expect less seasonality in our European waterfall realizations to start in 2024 and beyond, as we reach the harvest stages of the fund lives for certain funds.
Realized income in the first quarter totaled $254 million, up 15% from the year-ago period. After-tax realized income per share of Class A common stock was $0.71, 9% higher than the level of the first quarter of 2022. As of March 31, our AUM totaled $360 billion compared to $325 billion a year ago. Our fee-paying AUM totaled $234 billion at quarter end, an increase of 18% from the prior year. Our year-over-year growth in fee-paying AUM was primarily driven by meaningful deployment across our U.S. and EU Direct Lending, special opportunities and credit -- alternative credit strategies, which all pay management fees on invested capital. As Mike mentioned, our expectations assumed a slower deployment environment in the first quarter. And our actual results were in line with our expectations for fundraising deployment and quarter-ending AUM and fee-paying AUM.
As Mike highlighted, we're rebuilding our shadow AUM, which sets the stage for higher deployment and future management fee growth. Our AUM not yet paying fees available for future deployment totaled $51 billion at quarter end, which represents over $480 million of incremental potential future management fees. Our incentive eligible AUM increased by 10% from the first quarter of 2022 to $211 billion. Of this amount, $67 billion was uninvested at year-end.
In the first quarter, our net accrued performance income rose to $882 million, an increase of $50 million from the previous quarter. Of this $882 million of net accrued performance income at year-end, $614 million or nearly 70% was in European style waterfall funds, of which $351 million is from funds that are past their reinvestment period.
Regarding fund performance, despite an extended period of market volatility, our strategies generally continue to perform well relative to their benchmarks. While the full performance details are in our earnings presentation, we wanted to highlight some of our larger fund strategies.
In credit, all our key composite strategies across U.S. and European Direct Lending and alternative credit delivered positive gross performance for the first quarter, ranging from 1% to 4%, with 4% to 11% returns for the last 12 months.
In Private Equity, both of our core investment strategies have meaningfully outperformed the public equity and high-yield markets over the past year. These strategies are designed to take advantage of the volatility in the markets. Our special opportunities composite generated a gross return of 3.2% in the first quarter and 10% over the last 12 months. Our corporate private equity composite was down a modest 70 basis points in the quarter, but up more than 4% for the last 12 months.
Within real estate, our U.S. Real Estate equity composite gross return modestly declined 70 basis points for the quarter, but was up slightly over the last 12 months as cash flow growth was largely offset by increases in cap rates.
Lastly, as we announced last quarter, we closed the purchase of the remaining 20% of Ares SSG's management business that we didn't already own. Our business across the region now has nearly 60 people in 8 offices managing approximately $12 billion in AUM. We hope to expand our geographic reach and product set across the Asia Pacific region over time under a rebranded Ares Asia. We're investing and expanding our investment capabilities to mirror what we have in the U.S. and Europe, including recent growth initiatives in real estate, growth equity, secondaries, alternative credit and infrastructure.
In addition to our regular quarterly materials, we posted a supplemental deck, which reclassifies historical financial results to reflect the Ares SSG business within our Credit Group. Since this business is now wholly owned by Ares, we include the former Ares SSG credit funds within our existing credit segment.
Finally, before I pass the call back over to Mike, I wanted to reiterate that based on our fundraising and deployment outlook, we remain on track with our growth objectives and the financial guidance that we provided on our last earnings call. Mike?

Michael J. Arougheti

Thanks, Jarrod. In 2022, we focused on investing in the talent and the infrastructure needed to support our significant fundraising and deployment ambitions for the next several years. This year, we're now focused on executing on these goals, and we're off to a great start with several of our important fundraises, which we believe will set us up for strong growth for the remainder of this year and beyond. We've also made great strides in broadening our product suite, both organically and through strategic acquisitions over the past few years. We're pleased to have fully integrated these acquired platforms, and we're on plan with our strategic and financial objectives. We're now in the process of scaling these businesses with new products and other synergies.
We've already executed on several of our growth objectives, including the launch of our Australian Direct Lending and credit secondary strategies in the institutional channel, along with the formation of AWMS and the launches of our private markets fund and our nontraded BDC in the wealth channel. We also have exciting growth plans for our infrastructure debt strategy.
So in conclusion, we believe that our business is well positioned to take advantage of the volatile market backdrop. Looking at our historical performance, some of the fastest periods of our growth have come during recessions and market dislocations. I believe that we're better equipped than ever as we potentially approach another similar period.
Currently, we have more available capital, a larger team and more tools in our toolbox, which we believe positions us well to take advantage of the many opportunities that we expect to see in this market environment. Our long-term capital flexibility and scale, asset-light balance sheet and robust investment in portfolio management capabilities puts us in the position to be opportunistic when others cannot. As always, I'm grateful for the hard work and dedication of our team, and I'm appreciative of our investors' continuing support for our company.
And operator, I think we can now open up the line for questions.

Question and Answer Session

Operator

(Operator Instructions) First question comes from Craig Siegenthaler with Bank of America.

Craig William Siegenthaler

Mike, I hope everyone is doing well and congrats on the ASIF launch. My first one is on fundraising. So your institutional sales teams must be very, very busy at this moment, raising multiple flagships in parallel. But can you comment on interest levels between your credit funds and then your private equity fund and also how re-up conversations are trending? And I'm especially interested in ACOF VI.

Michael J. Arougheti

Sure. Obviously, we don't comment on specific funds in the market. So maybe, I'll just give you a couple of themes to think about. Obviously, you saw what we accomplished in our core commingled credit funds with some pretty meaningful and quick first closes relative to prior fund size for the alternative credit vehicle as well as the European credit vehicle. And as we talked about in the prepared remarks, 90% of the commitments that came in, in the quarter were from existings. So that should give you a pretty good indication for the re-up appetite and the receptivity from our existings.
Also, you saw just since quarter end, in those 2 funds alone, we brought in commitments of an additional $5 billion plus. And so that momentum continues. I would say, generally speaking, all things private credit are being very well received, not surprisingly, given the defensive positioning of the asset class to benefit from rising interest rates, the ability to deploy more actively in a lower transaction environment. And I would, again, expect that to continue, both for institutional and retail.
We are seeing from investors, I don't know if I would call it reduced appetite for private equity, but reduced ability to invest in pure regular way private equity. And what I mean by that would just be non-differentiated growth buyout. And that's largely a function of the transaction environment money not coming back to those LPs and therefore, denominator effect.
We're still in the early days of our private equity fund raise, but I would remind you that we have a pretty differentiated approach. Obviously, we've been in that business for over 20 years with a consistent track record, but we do have a distress for control capability in that fund, and that fund actively invests alongside our successful SOF franchise. And so our expectation and hope are that, given the ability for that strategy to play distressed and opportunistic the way a lot of our credit strategies are that we'll have a differentiated experience, but still too early to tell.

Craig William Siegenthaler

And then just kind of refocusing that within credit, how are you seeing demand trend between private credit and liquid credit, really just given perceived valuation discount now on the liquid side? And I know a lot of your -- some of your liquid funds tend to be in open vehicles that are redeemable. But on the sales front, are you seeing any sort of shift in the demand to the liquid side?

Michael J. Arougheti

It's a good question. We've actually -- we saw really good inflows on our liquid credit business in the first quarter. So I think to your point, people do see the value opportunity in the liquid credit markets. I'd also point out, if you look at our core private credit funds, ASOF, Pathfinder, even ARCC, those funds all have the ability to flex between liquid and illiquid. And so you should expect that when the public markets are offering significantly better value, we'll be spending time there and then obviously harvesting those gains to redeploy into the private side of the house when that deployment opportunity picks up. So there is a fair amount of dynamism in the existing "private funds" that are taking advantage of that liquid market opportunity. And I think our investors see that, and that's reflected in the fundraising as well.

Operator

Our next question comes from Adam Beatty with UBS.

Unidentified Analyst

Just want to ask about redemption requests in the wealth management channel, which seemed to have ticked up somewhat, although acknowledging that, that positive net flows are obviously still a very good thing given the backdrop. But just wondering what you're seeing as the motivation or drivers for the elevated redemption request. Is it specific to the real estate asset class or just client liquidity needs or what have you? It would be great to get your thoughts on that.

Michael J. Arougheti

Yes, it's a good question, Adam. And again, we've -- I think we're fortunate and differentiated from some of the peers in that we are continuing to see net flows in both the REIT complex as well as the credit interval fund. And as we highlighted, we have recently launched our nontraded BDC with $1.5 billion of capital, and we're bringing that into the retail channel in the back half of the year and expect healthy demand there. So seeing the flows, it would tell you that the appetite within the channel for alt is still intact. And we do know that in talking to the top of the house at most of the large wealth and RIA platforms, that the desire to grow alt exposure is also intact.
So when you look at what's going on, I -- we never really know the motivation for redemption. I think some of the early redemptions we saw in peer portfolios was less a comment on the market and more that some of those folks owned the REIT shares on leverage and they were getting redeemed, and there was a little bit of leverage unwind coming out of certain geographies.
I think now it's probably a combination of the 2 things that you highlighted, Adam, which is just a general commentary on perceived risk and opportunity in the commercial real estate market and obviously, client liquidity. But I can't apportion the outflows to those 2 in any quantitative way, but I think those are definitely at play.
I will say, just looking at some of the peer data and the market data, it does appear that some of those outflows are slowing. And I think when we get to stabilized rates and stabilized cap rates, that you'd hopefully see that trend reverse.

Unidentified Analyst

Excellent. That's helpful. And then I just wanted to turn to Aspida and annuity underwriting and just kind of what you see as the growth capacity there? It can be somewhat at least resource-intensive to do annuity originations. But just how much you're growing kind of capacity there and then assuming some productivity improvement will layer on to that.

Michael J. Arougheti

So I think one of the things that we've tried to articulate, but I don't know if it's appreciated, is one of the benefits of the way that we've organically built the Aspida platform, as we talked about in the prepared remarks, is we're not dealing with surrenders or legacy book challenges. But we also have a fully tech-enabled paperless insurance platform, which actually is pretty efficient in terms of managing annuity sales and scaling.
Telling you what you probably know, we have the ability to accelerate or moderate sales based on price and structure of the product offering. And depending on where we are in terms of our deployment or a view on the yield opportunity on the asset side, we'll push and pull on it. But to give you some perspective, in the first quarter, we were doing about $600 million per month in new annuity sales, just to give you a sense for capacity on the platform in this type of market environment.

Operator

Our next question comes from Alex Blostein with Goldman Sachs.

Alexander Blostein

First question, I wanted to zone in on kind of the current environment and the fact that dislocation in the regional bank space is likely to have longer-lasting effects, I guess, some credit availability broadly across the market. So with that in mind, I'm just curious to get your thoughts on what businesses do you expect to get Ares much larger on the back of some of these kind of rising lending constraints in the space that might not be as large today, but could be really interesting down the road?

Michael J. Arougheti

It's a great question and obviously, this is purely us speculating, but it's informed by what we've seen in prior cycles. The first phase of this, as we mentioned in the prepared remarks, is that we are seeing a very healthy amount of pipeline building with the banks themselves as our counterparty on portfolio sales, red cap trades and various other things just as they navigate the current environment.
The biggest beneficiary of this first phase is our alternative credit business. As the banks, both being in small, retreat to kind of their core businesses and exit large portions of the market, I think that will create opportunity in the primary market for alt credit. And I'd put that probably at the top of the list of growth opportunity coming out of this.
That being said, when you think about bank behavior and credit contraction, commercial real estate lending, I think, will be a significant beneficiary. I think telling you what you know, Alex, if you look at commercial real estate exposure, 70% of commercial real estate loans are held in the banking system. And on average, 40% of regional bank balance sheets are commercial real estate loan exposures. And so if there is credit contraction and stress at the property level, I think that's going to open up a pretty big opportunity for us globally in and around the commercial real estate lending business.
Needless to say, as the larger banks maybe reduce focus or have the inability to be as aggressive as they have been on the leverage finance side of the house, big beneficiaries there are our SOF franchise and our direct lending franchise.
And then I would also just highlight, generally, given the position of our private equity business, both ACOF and ASOF as we begin to see capital structure distress and operating distress, they're going to be big beneficiaries as well. So I kind of just mentioned all of our strategies. Now that I think about it, I would say some are going to have more direct benefit, but I think this credit contraction is real, and I think it's going to really drive more capital into the hands of folks like us.

Alexander Blostein

Got it. That's perfect. That makes a ton of sense. My second question for you guys was around the secondaries business. I know, Mike, you talked about rising pipeline of opportunities there as well, both on the GP side and the LP side. But I guess when we look at the trends recently, management fee growth has been a little bit more muted. So maybe help us bridge kind of the near-term trends and the outlook for kind of that business resuming management fee growth over the next, call it, I don't know, 18, 24 months.

Michael J. Arougheti

Sure. So the bulk of that business was the Landmark acquisition. We're now 2 years removed from closing. That's been fully integrated, what I would say, retooled from a product standpoint, and now we've begun to innovate and grow. So the 2 big new products coming off of that platform are our PMF fund, our private markets fund, which is our first private equity-oriented product that we've put into the wealth channel, and we have high hopes for the long-term growth opportunity there. And two, is the launch of our credited secondaries business, which was always a very big motivator behind the big push into the secondaries market.
Interesting, when you just look at the acquisition, we kind of acquired the current vintage of PE fund midstream, and we're now deploying our [17] fund that was kind of raised during the acquisition and initial integration period, and we are currently capital raising for our real estate and infra strategies as well. So we're in capital formation mode. And then obviously, as we begin to have closings on those, you'll begin to see the revenue begin to tick up, both on committed capital and invested capital for the credit strategies.
The reason we're so optimistic there is back to this overarching theme of capital constraint illiquidity and denominator effect, we are seeing LPs seriously look at liquidity in the secondary market. I would expect that 2023 will likely be a record year for LP-led secondaries, just based on what we're seeing year-to-date and the way the pipeline is developing. But needless to say, the pricing in that market is more attractive than it's been in a long time, and we're seeing the market bid kind of [85, 90] for PE and maybe [70, 75] for venture. So there's a real value opportunity there.
And then on the GP side, for those GPs that are in between funds are experiencing a slower capital raise for their next fund getting into the GP-led side of the house with things like continuation funds and NAV loans, we think, is going to turn on in earnest as well, and that's -- that pipeline is building. So I think the supply-demand dynamic in that market is extraordinarily good.

Operator

Our next question comes from Michael Cyprys with Morgan Stanley.

Michael J. Cyprys

Maybe circling back to some of the commentary on the banks pulling back and the opportunity set there. If banks continue to pull back and tighten lending standards, it would seem like on one hand, that leaves a void in the market where firms like yourself and private credit can step in. You mentioned some areas that you're excited in CRE and alt credit. But how much of a void can the private markets and Ares fill? And on the other hand, you also borrow from the banks across a number of your businesses. Maybe you can remind us where you borrow from the banks. So what sort of impact that could have if they were to tighten standards for you?

Michael J. Arougheti

Sure. It's an astute question. We do borrow from the banks. Probably 60% to 65% of where we borrow is to leverage our private credit portfolios. And similarly, I'd probably venture to say 60% to 65% of that borrow is from the G-SIBs. I think in markets like this, as we consolidate share, I think you're going to see the G-SIBs consolidate share as well and probably do more business with the larger platforms. So my hope is that even with a overall shrinking of capital availability, that Ares and those like us will get a disproportionate share of that balance sheet.
The implication, though, is that if that leverage is not available, obviously, given the return expectations of our investors, that just means higher unlevered ROAs in the market, which means valuations need to continue to come down to meet that market reality, which is obviously deflationary.
And I would say the same for just the basic capital constraint that we already talked about. Obviously, I don't think that the private markets can absorb the entirety of that channel, nor should they. Obviously, we live symbiotically with the banks as partners in a lot of the things that we do. But if you look at C&I loans across the entire banking landscape, they're pushing $3 trillion today. And if you look at private credit installed base for the U.S. market, it's about $1 trillion. So there's going to need to be a pretty significant amount of capital formation in order for the private markets to really fill the void if it's significant. So it could challenge the economy.
I think the flip side of that is obviously, the private markets will get an opportunity to be extremely selective in the risks that they want to take and what they want to get paid for that risk if capital is scarce. And I think that's one of the reasons why we're so excited about the backdrop. I would expect that we're going to get higher risk-adjusted returns for higher quality borrowers and assets that we've seen in a long time.

Michael J. Cyprys

Great. And just a follow-up question on CRE. Clearly, a lot of concern out there in the marketplace around commercial real estate. What are some of the key risks that you guys see across the space as you look out? How do you see that playing out so far? What are some of the signposts you guys are looking for? And maybe you can help quantify what sort of opportunity set could that be for Ares over time.

Michael J. Arougheti

I'll give you my thoughts. Bill Benjamin, our Global Head of Real Estate, is on as well, so he could probably do a deeper dive. But I think you have to -- you can't look at all segments of commercial real estate as equal, and you can't look at the geographies the same way either. So obviously, office is severely challenged right now. Whereas as we mentioned in the prepared remarks, industrial and most of the multifamily sectors that we're participating in are still seeing good fundamental strength.
Europe is showing some differentiation from the U.S., European office. We're not quite seeing the same work-from-home stresses and supply-demand imbalances there. European retail actually starting to get a little bit more interesting. So there's also a bifurcation between U.S. and Europe.
I think the biggest issue, frankly, is you have a broadly leveraged asset class with base rates that are up 500 basis points. And so you're seeing, and we see this in our primary market, unlevered debt yields in that market, 9.5%, 10% plus, and that just becomes really difficult to support if you're an equity owner of a challenged piece of real estate and, obviously, has a pretty significant implication for future value. So that market is going to have to go through a pretty significant period of repricing and deleveraging. There are a handful of maturities that are going to be coming up here in the next 12 to 24 months that will continue to stress the market. But Bill, I'll kick it to you to tack on to that as...

William Stephen Benjamin

Thanks, Mike. I would be echoing much of what has been said already. I think that the biggest risk is the fundamentals in the office market, where we are, thankfully, on a global basis, very underexposed. It's less than 10% of our net asset value, and it's only 2% in the U.S., I believe. So -- but the contraction of credit that was touched upon a few minutes ago, it will make our life a little bit more challenging for the next 24 to 36 months, but it will be an opportunity for our growing debt business. The milestones that we're looking for is a bottoming out on values. And I'm not sure we're there yet, and I don't want to call it, but what we're seeing are moderating.
We're seeing discount rates and terminal cap rates in the third-party valuations. We are getting for much of our portfolio embedding a lot of equity risk premium. So we think values are coming. And we want to see more realistic selling in the market. There's opportunistic purchases from funds that have gates coming down or at the end of their life, and sponsors are either very in the money or very out of the money. But we'd like to see a bit more liquidity in the market and realism in the sales market and then continued strong leasing in the sectors that Mike touched upon. We are growing student exposure for both in the U.S. and in Europe.
And leasing has done about now or a little bit earlier for the next academic year, and we are way, way ahead of where we've been in prior years. So that's a sector that we are very bullish on as well. So office fundamentals and availability of capital are the biggest risks, but the ability to use capital either in our debt or in structure subordinated equity positions in our other funds are going to create very good opportunities.

Operator

Our next question comes from Brian Mckenna with JMP Securities.

Brian J. Mckenna

So there's clearly a lot of focus on private credit right now. And just given everything going on in the backdrop more broadly, there's a lot of opportunities within this part of the industry. So we're starting to see more and more new players coming into the space. So it will be great just to get your updated thoughts on the competitive landscape for private credit specifically, and then how you kind of see it evolving over time.

Michael J. Arougheti

Yes, I think you have to find the signal through the noise, because there's a lot of folks that are hanging a shingle in the private credit space that are not really forming capital of any significance or building the necessary origination investment and portfolio management infrastructure to scale. And so I think the large entrenched players are the players, and there will be some folks that nibble around the edges.
But I would say from a competitive set, we're not seeing significant new entrants taking share. We have a number of entrenched competitors that are undercapitalized right now. So we're actually seeing some reduced capital in the market, which we think will benefit us given where we are in our fundraising cycle. But yes, I would say not a significant change, and this is not a market that you just jump into, right?
If you look at what we've been building here over the last 20-plus years, in our U.S. business, we have 180 people. We're actively calling on 500 private equity sponsors in our Private Credit Direct Lending business. We've deployed over $100 billion with incredible performance. You can't really replicate that, both from a track record relationship and expense standpoint. So as I said earlier, I would expect that market share will continue to consolidate behind the scale players, like it has in every other cycle that we've experienced. And I would highlight that, that's true in Europe as well, where we probably have an even greater leadership position across the private credit landscape.

Brian J. Mckenna

Yes. Very helpful. And then just to follow-up on the new nontraded BDC that you launched. Could you just talk about early demanded feedback for this product, just given the current environment that we're in? And then what's the ramp going to look like in terms of adding new distribution partners over the next 12 to 18 months?

Michael J. Arougheti

Yes. So again, too early to tell. We took the approach of seeding the fund to get it scaled. So that when we took it into the wealth channel, people would see the portfolio, and we would not have to deal with any meaningful J curve issue as we supported the growing dividend there. So as we talked about, we have $1.5 billion of capital already in there through the seeding of that fund.
It formally launched a week ago. And as we talked about in the prepared remarks, we have our first retail distribution partner coming online in Q2. And so I think on the next earnings call, we'll have a better sense for kind of what the steady-state demand is out of that first distribution partner.
But again, if you believe that private credit is in demand and that the wealth channel is under allocated to private credit similar to the institutions, I think given our brand and given the track record of performance that we've demonstrated in ARCC over the last 19 years, that the demand will be there. But we'll have a much better sense the next time we're all together once we get the product into the channel.

Operator

Our next question comes from Benjamin Budish with Barclays.

Benjamin Elliot Budish

I wanted to check back on the European waterfall opportunity. It sounds like you're still quite confident on the outlook for this year. Can you maybe just remind us how much of the longer-term look comes from private equity versus credit? Just so we can kind of get a better sense of what is the risk as we look further out that those targets may be easily achievable, more challenging. And any color you could provide there?

Jarrod Morgan Phillips

Sure. Thanks, Ben. Great to hear from you. Yes, we still -- as I reiterated in my prepared remarks, we're still pretty confident about that end-of-the-year amount. I'll remind you, and I touched on it a little bit in my comments, that we're still in the early stages of the harvest period. And as we enter more into the later stages of the harvest period, that's when you are kind of removing that seasonality that we see.
Right now, the seasonality means that we see larger tax-related payments that happened in the fourth quarter with a true-up to the tax actual payments that happened here in the second quarter. And so that's what drove my prepared remarks, but we still reiterated the guidance for this year.
In terms of that long-term amount that we laid out for you and put into the presentation that you can find on our Investor Relations website, about 75% of that balance is from credit-oriented. So the majority or the vast majority of it is really coming from our credit-oriented funds. So that's what allows us to have that high predictability in terms of what we believe the balance will ultimately be. And it's always a little bit subjective in terms of when that will occur once you enter into that full harvest mode, but it becomes a much more predictable balance.

Benjamin Elliot Budish

Got it. That's helpful. Maybe one more kind of tactical question just about what happened in Q1. I think you mentioned the nearly $13 billion of deployment was on track versus your initial expectations. Just curious, to what extent did March sort of result in a bit of a slowdown? And perhaps to what degree were you ahead of track in January and February, such that you sort of ended up the quarter where you thought you'd be?

Michael J. Arougheti

Go ahead. Go ahead, Jarrod. I'll chime in after. Go ahead.

Jarrod Morgan Phillips

Yes, absolutely. I'd say the one thing that's important to remember is that Q1 is always seasonally slow. And as we looked at Q4 of last year and coming into Q1, we were expecting a little bit of a slowdown time. And then you've always -- for the last few years, you've always had something happened in that February and March time frame that's resulted in a little bit of slowness. We had the banking issues in that sector, which did create just a little bit of time. But overall, I think as we mentioned in the prepared remarks, you've seen our pipelines begin to build in direct lending. You've seen there's a little bit more activity that's beginning to happen. It's kind of what we see every year around this time, but it was overall a slower quarter, and that was in line with what we expected.

Operator

Our next question comes from Kenneth Lee with RBC Capital Markets.

Kenneth S. Lee

Just to piggyback on the previous question around capital deployment. Wonder if you could just share your thoughts on how aggressive could you be in terms of deploying capital within private credit or direct lending, just given -- especially given very attractive terms and spreads and the current macro backdrop?

Michael J. Arougheti

Sure. So I don't know how to say aggressive. And I think if you look at the size and scale of those businesses, obviously, there's a pretty consistent amount of deployment. So if you look year-on-year LTM deployment for U.S. direct lending was $32 billion in 2022. It's about $25 billion right now. European was $12 billion. Now it's close to $14 billion. So that's showing a little bit of growth. But those businesses are at a scale now where there's some pretty steady deployment. And we've talked about this before, 50% or so of deployment opportunities in those businesses is coming from within the existing portfolio, either as companies deleverage and look to releverage, execute on a growth plan, go through a change of ownership. So there's an embedded pipeline of opportunity just given the size and diversification that exists in the existing portfolios.
The market is definitely coming our way. And so I think as we scale capital, that should also have the impact of scaling deployment. So as we're getting these funds into the market and having successful closings, that sets us up to be a little more "aggressive" as you said on the deployment side as well.

Kenneth S. Lee

Got you. Very helpful there. And then one follow-up. Perhaps I wonder if you could just tell us what you're seeing in terms of recent direct lending trends within Europe or Asia, especially given the announcement about the SSG business? Maybe highlight some of the key differences you're seeing with what you're seeing within the U.S.

Michael J. Arougheti

Yes. I would say U.S. and Europe are kind of in line right now in terms of the structure of new loans and the risk return that we're generating and the performance of the existing portfolios. So we're pleased with the consistency. Particularly, I think some of the concerns that folks were having around more challenging economic backdrop in the Eurozone, we're just not seeing that roll through the portfolios or the transaction activity.
Just to put things in perspective, which is why people are so excited, most new loans in those markets are getting priced on a first-lien basis, somewhere between SOFR 5.50% and 5.75% at lower attachment points and better structures with 3 points of fee and some modest call protection, in many cases. So back-of-the-envelope math is pretty high quality. First-lien loan is getting priced in the 11.5% to 12% range. And then obviously, to the extent that, that bleeds into second lien or [indiscernible] or now into the mid-teens unlevered. So it's pretty compelling, particularly in a market where it's just difficult to price equity risk.
Asia Pacific, it's hard to say because it's different by country and by region. I'd say the regular way acquisition finance business in Australia and New Zealand, which is a more mature capital market and buyout market, we're seeing similar types of trends, both on credit and deployment. And then I would say, in other parts of the market, it's much more of a special sits and opportunistic credit play, which really speaks to the strength of the legacy SSG team over there. So the APAC opportunity, it's not as robust from an indiscernible standpoint, but probably offering more consistent, opportunistic plays across the region.

Operator

Our next question comes from Mike Brown with KBW.

Michael C. Brown

So just looking at the investment income line in the Real Assets segment this quarter, it looks like it was impacted by subdued activity in the debt markets. And based on some of the real estate commentary you guys made earlier in Q&A, it does sound like activity there remains relatively subdued. So if that continues to remain weak here, should we expect a repeat of 1Q for that line in the second quarter? And then what should we be looking at in the public markets or monitoring, just to keep an eye on when that activity would pick up.

Jarrod Morgan Phillips

Mike, do you want me to take that?

Michael J. Arougheti

Yes, if you want. I can chime in after this.

Jarrod Morgan Phillips

Yes. Taking a look at that, it's really hard to predict because most of what we have in our investment income is a result of us seeding funds or our GP stakes in funds that ultimately weren't taken as employee co-invest. So there is an episodic nature of when we recognize some things.
Now in terms of some of the vehicles that we have in there that are more debt-oriented, there is some expense that comes through just on the use of leverage that's in there and on the use of line fees. So if we don't actually have a transaction that comes through, we still obviously have to pay that line fee. So it is hard to predict from quarter-to-quarter what exactly that will be. We typically do have sales throughout every period, as Bill and Mike both mentioned earlier. As the market thaws or as there's an opportunity to sell assets, some of our more legacy funds may take advantage of that, but it's really hard to predict exactly when that will occur.

Michael C. Brown

Okay. Great. And great to just the update on what you guys are seeing from a credit perspective in your portfolios. I guess we're also kind of contending with where is -- where are the credit risks going to emerge next. And so from your vantage point, where do you think that, that may occur? It sounds like real estate is still, of course, where some of the challenges will probably continue to arise. But as you look out over the next 12 to 18 months, what are you guys thinking about in terms of how credit could evolve from here?

Michael J. Arougheti

Look, your crystal ball is as good as ours. I think real estate -- again, certain sectors of real estate is probably the easiest to see, just given the leverage profile and debt yields in that market. I think we could see a weakening of kind of lower end of the consumer market. I don't think we have exposure there, but that could present some opportunities in our alt credit business.
Kind of on the middle market side, as I said, we're just not really seeing -- we're not seeing it. We had 8% EBITDA growth in our ARCC book, which again is a good proxy for the U.S. Direct Lending business. In our Private Equity franchise, we saw 5% to 10% EBITDA growth. So the earnings are coming through. I think some of the inflationary pressures are abating.
And if you look at the stresses in the corporate market right now, it's really about over-levered balance sheets and a 500 basis point increase in base rates in 12 months, more than it's about earnings recession. And for better or for worse, we've been the big beneficiary of that increase in base rates. And so when we're coming to the table, talking to our partners on the equity side as a counterparty on a loan, it's typically around how do we relieve cash burden of the capital structure in exchange for other compensation.
But it is a different set up than we've seen in prior cycles where typically, when we're talking about defaults, earnings are falling out of bed and rates are coming down. So we're giving away return while we're dealing with operational distress. And most of the conversations now are really about just capital structure flexibility and the inability for folks to service their existing capital structures. And that's an easier conversation. Frankly, it's an easier risk to box right now, and that's generally what the conversations have been on the bulk of the corporate loan book.

Operator

Our next question comes from Rufus Hone with BMO Capital.

Rufus Hone

Probably a question for Jarrod. I wanted to come back to some of the comments you made around investments that you've been making in the platform over the past couple of years. And I was hoping you could spend a minute on how we should think about that translating in terms of compensation and G&A growth for the rest of 2023. And how that might play into the FRE margin outlook?

Jarrod Morgan Phillips

Sure. So we've made -- you can kind of quantify the investments in a number of different manners. Obviously, the acquisitions that we've had over the last couple of years are investments where we've used our balance sheet capital for that. And then there's also other investments, for example, taking a GP stake in new funds as you launch into a new strategy or you enter into a joint venture with a partner to launch that strategy. So often, that can come with a lot of internal resources, so that it is not depreciative to your FRE margins.
That can actually ultimately be very accretive to those margins because you might be branching out a strategy in an area where you're already -- where you already have activity for something like our sports media and entertainment fund, where we already have individuals involved, and we're able to launch a new vehicle off of that. Or you could have something like our credit secondaries business, where we're able to use people from our credit business as well as bringing in some outside people and using some of the internal secondaries professionals to build a new strategy within that.
So those amounts, those are a little bit harder to quantify in terms of how your FRE is ultimately impacted at the outset. What you do see is the use of capital from the balance sheet to make investments -- to make co-investments along with joint ventures.
As we've talked about in the last couple of calls, really where we were in 2021 and 2022 is we knew that we were going to have some very large commingled products coming to the market over this year, and we knew that we needed to prepare as a business for those and begin to hire and build out the ability to source and originate as well as to serve through the back and middle offices. So that hiring is what led to our extreme headcount increases over the last couple of years. And as we talked about at year-end, that we thought that, that would moderate into this year as we really digested those hires, and began to raise and then deploy those new larger commingled funds.
So that's really what's gone into the FRE guidance that we've talked a little bit about saying that we're still on pace for that 45% run rate that we laid out at our Investor Day at 2025. But in addition, as we see us coming to that, we believe that the second half of this year we'll really begin to see the margin expansion as we see that deployment ramp more earnestly.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Michael Arougheti for closing comments.

Michael J. Arougheti

I don't have any other than just want to thank everybody for their time today and look forward to speaking again in a couple of months and hopefully have some great updates. Talk to everybody soon. Thank you.

Operator

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available through May 26, 2023, by dialing (877) 660-6853 and for international callers by dialing 1 (201) 612-7415. For all replays, please reference conference number 13736874. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of our website. You may now disconnect at this time.