Ares Management (ARES) Q2 FY26 earnings call: guidance and Q&A

What's driving accelerating institutional demand for private credit, when will private wealth demand return, and will these channels behave countercyclically?

Institutional demand is accelerating due to under-allocation and opportunity for excess returns in a less competitive environment. Wealth channel grew YoY, with strong demand for diverse products. Non-traded BDC redemptions are concentrated in non-U.S. family offices, with core U.S. investor redemptions declining. Expects stasis in 2-3 quarters.

“I still think it's early days to know exactly how these will play over time, but there is a risk that some of the wealth flows could be more pro-cyclical than people thought they were, which is why we continue to index aggressively into the institutional market.”

asked by Craig Siegenthaler · answered by Michael Arougheti

Where does inorganic growth in PE rank on the priority list, and what are the key parameters for financial and strategic fit for Ares deals?

Ares has a well-honed framework for inorganic growth: culturally, strategically, and financially accretive. Industrial logic for larger PE presence includes LP demand, broader solutions for companies, deeper banking relationships, and wealth channel demand. Price must be right, and cultural/strategic fit is critical.

“I can't comment on any rumors or speculation in the market, but I appreciate the opportunity to reiterate our framework for thinking about inorganic growth... it's a simple framework, which is we needed it to be culturally accretive because this is a people business at the end of the day. We needed to be strategically accretive... And then lastly, it needs to be financially accretive.”

asked by Alexander Blostein · answered by Michael Arougheti

What's driving the constructive tone on U.S. Direct Lending despite tepid M&A, what are sponsor clients saying, and how does the pipeline inform management fee growth expectations for H2?

Broad-based deployment across the platform mitigates slower U.S. DL. Pipeline is at record levels, up 20% QoQ. Europe DL is a bright spot. U.S. DL can deploy even with slow M&A via incumbent relationships. Sponsor activity is picking up, with NDAs up 35% and logged deals up 30% QoQ, indicating acceleration.

“The number of NDAs that we've signed is up about 35% quarter-over-quarter and the number of deals we've logged is slightly behind at 30%. So that's kind of the precursor to what we would call pipeline. I can't say with perfect certainty to you that, that 30% to 35% converts perfectly, but it is an indication that sponsor activity is picking up dramatically as we head into the back half of the year.”

asked by Steven Chubak · answered by Michael Arougheti

What are the drivers for accelerating FRE margin improvement towards the upper end of guidance in H2, and how to think about incremental margin opportunity into 2027?

Margin improvement driven by revenue velocity from new products (data center, integrated GCP) and structural items like AGM expenses being concentrated in Q2. Primary goal is growth (20%+ RI), so reinvestment in marketing and front-office professionals is key. Natural margin expansion exists, but reinvestment is prioritized for continued growth.

“Our primary goal is growth. We want to hit 20% plus on RI. And to do that, we often need to invest in... So even when we have margin expansion, we're constantly looking at the team. Are there areas where we can be investing to create more business.”

asked by William Katz · answered by Jarrod Phillips

How should we think about the longer-term fee rate and margin profile of the digital infrastructure business versus broader real assets, given its vertically integrated development model?

Digital infrastructure has strong excitement and conviction. Rack rate fees and economics are attractive and in line with other Ares offerings. The vertically integrated model allows for controlled outcomes and better economics for Ares by charging back team costs to the fund. Forecast of $50 million to $100 million FRE by 2027 and beyond is reaffirmed.

“The rack rate, fees and economics on the fund are very attractive and in line with other Ares offerings. One slight difference, as you noted, is that we do have a vertically integrated model... we charge back the cost of that team to the fund, which ultimately, we think, leads to better returns for the investors but also better economics for Ares.”

asked by Michael Brown · answered by Blair Jacobson

If Ares institutes new structures for private BDC redemptions by geography, how long would it take before Ares has protection from outsized redemptions from certain regions?

New share classes with lockups, redemption penalties, and regional redemption queues would protect against future outsized redemptions. The current non-U.S. redemption queue (down from $1.2 billion to $600 million) is working its way through the system and is now below the 5% quarterly satisfaction level.

“I think going forward, to the extent that we implement some of the new features around lockups and redemption penalties and regional redemption queues that would be protective of this happening again in the future.”

asked by Wilma Jackson Burdis · answered by Michael Arougheti