Ares Management (ARES) Q4 FY25 earnings call: guidance and Q&A

How will the shift away from software origination to data centers/power impact overall deployment efforts, given software was a large source of credit?

Management asserts that software underwriting has always considered obsolescence risk, focusing on foundational infrastructure and regulated industries. They do not perceive a meaningful impact on aggregate origination volumes, as new markets open and close, and the firm's pipeline is at record levels. The shift to infrastructure and energy is a natural evolution.

“I don't perceive that this disruption is going to have a meaningful impact in any way on aggregate origination volumes. And as we said in the prepared remarks, our pipeline across the entirety of what we do is up at record levels right now.”

asked by Craig Siegenthaler · answered by Michael Arougheti

Can you elaborate on real-time wealth channel flows, particularly between direct lending and other products, and the sentiment from distributors regarding direct lending wealth products?

Management highlights intentional positioning of funds with institutional drawdown capital to manage wealth flow volatility. While some cyclicality exists, net inflows remain strong. January saw $1.2 billion in inflows, with similar trends in February, driven by broad-based demand including private credit and core infrastructure. Redemption queues are often driven by a small number of investors.

“In January, we saw very strong flows, as you said, $1.2 billion. We're seeing similar numbers coming in line through February. The demand is broad-based. We're seeing good flows in the private credit product, good flows in the core infrastructure product.”

asked by Alexander Blostein · answered by Michael Arougheti

What are your thoughts on real assets and secondaries as big opportunities, and can you refresh the timelines and expected sizes for your flagship credit vehicles?

Management expects continued breakout growth in real assets and secondaries, having strategically diversified into these areas. Opportunistic Credit Fund III is expected to close at or above $7.1 billion, Pathfinder III at or above $6.6 billion by summer. Fourth U.S. direct lending fund expected to launch this year with a Q4 first close, and seventh European direct lending fund in early 2027.

“I would expect to see continued breakout growth in real estate and secondaries or real assets and secondaries, for sure.”

asked by William Katz · answered by Michael Arougheti

How do you see demand improving for rated ABF products, and what are the deployment opportunities for Pathfinder and Pathfinder Core, given potential shifts from direct lending?

Ares has built a strong ABF business, focusing on non-rated products for higher return premiums, now moving into high-grade rated markets (50-50 split). They avoid subprime consumer, e-commerce aggregators, and auto. Deployment growth has been significant, and consolidation is expected due to scale benefits. Deployment will likely remain 50-50 between rated and non-rated, but non-rated generates more profit dollars.

“I think it will continue to be one of our fastest-growing businesses here. And I think the deployment is going to probably still look 50-50 when all is said and done.”

asked by Kenneth Worthington · answered by Michael Arougheti

Why did full-year catch-up fees in secondaries appear less than year-to-date? And what is the geographic breakdown of wealth management AUM, particularly for Asian investors?

The apparent discrepancy in catch-up fees is due to the timing of a third infrastructure secondaries fund close in Q3, which included full-year amounts. For wealth AUM, approximately 30% of capital gathered over the last two years is from outside the U.S., mostly non-APAC. APAC exposure is estimated to be single-digit, primarily from Australia, New Zealand, and some early success in Japan.

“I would venture to say it's a single-digit type exposure to the APAC region and pretty diversified by geography.”

asked by Brennan Hawken · answered by Jarrod Phillips

What is the incremental opportunity in the non-sponsor channel for deployment, pipeline size, and how do spreads compare to sponsor-backed deals?

Ares has invested heavily in non-sponsor origination across several industries, historically representing 10% of originations. They aim to grow this to 15%+ of gross originations in the U.S. Non-sponsor deals generally offer higher spreads and lower leverage with better documentation, though sponsor business continues to grow.

“You should expect 10% ongoing. And then hopefully, in the next 3 to 5 years, we're hoping to get it to 15-plus percent of our gross originations in the United States.”

asked by Brian Mckenna · answered by Mitchell Goldstein

Can you elaborate on the idea of getting bigger in private equity, potentially through acquisition, and the strategic benefits and assessment criteria for such a move?

Management confirms interest in growing PE, driven by client demand, nurturing equity ownership skills, leveraging management/board relationships, and enhancing Street relationships. They see consolidation in PE and a need for scale to serve defined contribution and wealth channels. Any acquisition must meet cultural, strategic, and significant financial accretion criteria, acknowledging PE is not a linear growth business.

“The argument for getting bigger in PE is, #1, given the size of our global business and how deep we are with the largest allocators, it's an asset class that people want to be invested in.”

asked by Michael Brown · answered by Michael Arougheti

What is the software exposure specifically within the direct lending book, how are these credits performing, and what portion of software deals were avoided due to underwriting discipline?

Software exposure is approximately 12% of direct lending AUM. Performance is strong, with portfolio companies generating over 40% EBITDA margins, average EBITDA over $350 million, and faster growth than the overall credit portfolio. Non-accruals are near 0. Ares maintains a high selectivity rate (3-5% acceptance) across its portfolio, including software, and largely avoided ARR loans (less than 1% exposure).

“If you look at direct lending specifically, it's probably 12% of direct lending against 8.7% of private credit.”

asked by Michael Cyprys · answered by Michael Arougheti