Ares Management Corporation (ARES) Q4 2014 Earnings Report, Transcript and Summary

Welcome to the Ares Management, L.P.’s Fourth Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded on Thursday, March 5, 2015. I will now turn the call over to Carl Drake, Head of Ares Management Public Investor Relations. Please go ahead.

Good afternoon and thank you for joining us today for our fourth quarter and year-end earnings conference call. I’m joined today by Tony Ressler, our Chairman and Chief Executive Officer; Michael Arougheti our President; and Dan Nguyen, our Chief Financial Officer. In addition, Bennett Rosenthal, Co-Head of Private Equity and Greg Margolies, our Head of Tradable Credit will also be on the call today and available for questions. Before we begin, I want to remind you that comments made during the course of this conference call and webcast contain forward-looking statements and are subject to risks and uncertainties. Our actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings. We assume no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. Moreover, investors should note that investment performance in our funds as well as investment of our funds is discrete from an investment in Ares Management L.P.’s common units. During this conference call, we will refer to certain non-GAAP financial measures. We use these as measures of operating performance, not as measures of liquidity. These measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like-titled measures used by other companies. In addition, please note that our management fees include ARCC Part I Fees. Please refer to our earnings release for definitions and reconciliations of these measures to the most directly comparable GAAP measures. I’d like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in Ares or in any Ares fund. We’ve also posted a new fourth quarter and year-end earnings presentation under the Investor Resources section of our website at aresmgnt.com, which we will refer to during our call today. I will now turn the call over to Tony Ressler, Ares’ Chairman and Chief Executive Officer.

Thank you, Carl, and good afternoon everyone. I’d like to begin by taking a few minutes to recap a number of our accomplishments in 2014 and to provide our outlook for the year ahead. Overall, it was indeed an encouraging first year as a public company for Ares Management. During 2014, we raised over $16 billion both in comingled and separately managed accounts. We also continued to expand our investor base, raising capital from over 15 new direct institutional investors. Our fundraising efforts drove assets under management or AUM growth of approximately 11% for the year or about 16% on a pro forma basis if you include our acquisition of EIF which closed on January 1, 2015. We owned approximately 1% on our fee earning AUM, a slight increase over the prior year, generating approximately $600 million in management fees. Secondly, we invested about $14 billion of capital during the year across our four investment groups in North America, Europe and Asia, compared to approximately $15 billion in 2013. While we deployed a little less capital, you should expect that our investment base will be measured and dictated by our views on opportunity for value. We continue to generate strong relative returns across all four of our investment groups. Going forward, we remain well-positioned to invest our assets opportunistically with more than $18 billion of dry powder available for investment or about 22% of our total AUM. Thirdly, consistent with our historical experience of growing both organically and through acquisitions into adjacent asset classes, we’ve added teams in both commercial finance and power and energy. We find these asset classes to be particularly interesting, given the significant demand from fund investors, but more importantly the quality of the underlying assets we are investing in. Commercial finance is a natural extension of our leading direct lending platform into specialty asset-based lending, while power and energy is an asset class that has positive aspects of both the corporate and real estate worlds, two areas where we have substantial expertise. Although we already have a sizable power and energy lending business, we believe that the equity side of this industry will provide attractive long lived assets for our investor base. We expect both of these strategies to contribute meaningfully to both AUM and management fee growth in 2015 and beyond. Finally, we’ve strengthened our capital position by raising attractive 10-year capital from our inaugural high grade notes offering. Going forward, we remain well-positioned with an under-levered balance sheet and access to a low-cost $1 billion revolving credit facility. Looking into 2015, we see material fundraising opportunities within each of our four investment groups, positioning us well for another strong year of growth and as importantly attractive investment opportunities. As we have discussed in the past, we continue to experience strong investor demand for alternative assets both from global equity investors seeking less volatility generally through our PE products, as well as global fixed-income investors seeking higher returns generally through our tradable and self originated credit products. We are also trying to expand our distribution channels to meet these needs and we’re seeing particularly strong growth from insurance companies, which now represent over $6 billion of our AUM as well as from traditional institutional investors, such as pension funds, sovereign wealth funds and endowments. Mike will walk you through some detail, but we do envision incremental fundraising potential within our private equity group, from our power and energy and Asian growth capital strategies and meaningful fundraising in our European direct lending franchise and new commercial finance strategy. We also expect gradual improvement in our operating margins as we focus on efficiencies and as we leverage our existing investment teams to invest our dry powder. I will now turn the call over to our President, Mike Arougheti, who will walk you through in quite a lot of detail our investing and fundraising activities by group before we go through our financial results. I thank you for your time.

Thanks, Tony. I’ll begin with a discussion on the investing and fundraising environments and then drill down into these activities by our four groups in order to provide some context around our results and our prospects going forward. For those of you that have our earnings presentation, I’ll refer to information on slides 4 through 9 and Dan Nguyen, our CFO, will then walk us through our fourth quarter and full-year results in more detail. So in short, we continue to find attractive investment opportunities across our business by employing the same strategies that have served us well throughout our history, particularly during periods of elevated asset pricing and strong liquidity. Most importantly, we are being highly selective utilizing our origination and information advantages across our platform and we’re using our flexible capital to invest up and down the capital structure and across markets and geographies in our search for relative value. We continue to seek to take advantage of markets where banks are exiting or becoming increasingly constrained and as we did at the end of last year invest aggressively during periods of market volatility as we often find the best investment opportunities during these times. As Tony mentioned, the fundraising environment for us remain strong as alternative assets are a growing focus among institutional and retail investors. Global investors, whether we are talking about pension funds, sovereign wealth funds, endowments, insurance companies or high net worth retail investors, all continue to seek additional return without commensurate or excessive risk. And we believe that they are gravitating to scale managers with diversified platforms like ours that can offer broad investment solutions. As you will see on slides four and five, we continue to be successful attracting new assets with more than $3.3 billion in gross new capital raised during the fourth quarter and $16.5 billion over the last year. Now, turning to our tradable credit group, we finished the year with $32 billion in AUM in long-only and alternative liquid credit investments across 72 active funds in the US and Europe. Our team of 60 analysts and portfolio managers invest across the spectrum of leveraged loans, high yield bonds, structured credit and stressed and distressed investments. Importantly, about 80% of our assets are floating rate minimizing the risk and increasing the opportunity from an eventual rise in interest rates. During 2014, our tradable credit strategies invested nearly $7 billion with about $5.3 billion invested by our long only strategies and about $1.7 billion in our alternative strategies. Despite strong corporate fundamentals outside the energy sector, the liquid credit markets were disrupted during the fourth quarter due to shortfalls in global economic data, plunging oil prices, and unexpected declines in interest rates all of which drove an aversion to risk assets. Asset pricing for energy issue was struggled, particularly in the high yield market where energy is a more significant component. During Q4, our high yield accounts were generally underweight the energy sector and although our bank loan accounts were not underweight energy, they were underweight risk assets. Therefore, our positioning helped us drive performance to be in line to slightly better than the relevant industries albeit with slightly negative returns. Going forward, the decline in loan and high yield asset pricing war with the second half of 2014 without material changes in broad fundamentals has provided improved risk-adjusted return opportunities for our long only strategies. In addition, we are now investing opportunistically in core energy assets that are economic in today’s pricing environment. Within the European liquid credit markets, we are finding strong fundamental value in northern Europe and are opportunistic buyers of bank-held assets in certain southern European markets due to tightening Central Bank regulations. On the fundraising side, during the fourth quarter, we raised close to $900 million in long only strategies driven by our fifth CLO in 2014 which was more than $500 million. We enjoy a leading position in this CLO market and we expect large scale managers like Ares to take market share in the US as risk retention requirements are phased in similar to the trends we witnessed in the European markets. With our second closing of $383 million, we now have total commitments of $1.1 billion for our fourth special situations fund already exceeding our $1 billion target. We’ve also had recent success within our structured credit strategies and as an example during the first quarter we raised a new $1 billion separately managed account dedicated to investing in the strategy. Turning now to direct lending, as you know, in direct lending we manage $29 billion in AUM at year end across North America and Europe. We believe we are one of the largest providers of self originated flexible debt capital to middle market companies in these markets with an established presence in North America for over a decade and in Europe since 2007. Across our global direct lending platform, we deployed approximately $4.3 billion with $2.7 billion invested in the US and about $1.6 billion in Europe. The direct lending market fundamentals have been more stable than the liquid markets and we are seeing some improving return opportunities as the tougher enforcement of OCC leveraged lending guidelines starts to have a greater impact. While some marginal capital providers have started to see a modest weakening of credit in part due to oil and gas exposure, our flagship direct lending fund, ARCC, reported strong fourth quarter and full-year results delivering a return on equity of about 12% and showing improved credit performance for 2014. The outlook for direct lending is positive as liquidity for certain capital providers is actually becoming constrained, leaving higher returns for those with capital like us. In Europe, our strategy continues to be to take advantage of the changing competitive landscape as banks are still overleveraged and face tightening regulation. This supply/demand imbalance provides attractive opportunities for highly selective credit pickers like us as we leverage our large team on the ground focused on the relatively healthy northern European economies. To that end, our fourth quarter fundraising activity was driven by adding new separately managed accounts and commitments of approximately $650 million in our European direct lending strategy. Looking forward to 2015, we expect to raise additional funds for our European direct lending strategy since we have invested well over half of our second comingled fund and market conditions continue to be very attractive. In addition, we launched fundraising for our new US commercial finance strategy earlier this year. Our private equity group managed $14 billion in AUM at year end on a pro forma basis for our Energy Investors Fund’s acquisition or as we call EIF, which closed January 1. In private equity, we managed three core strategies. First, North American and European flexible capital ranging from traditional buyout and growth capital investing to distressed for control; second, US power and energy assets; and third, growth equity capital investments in China. While we continue to be highly selective, we invested about $1.2 billion in the US and UK during 2014 in four growth oriented franchise businesses as well as follow-on investments through our flagship fund ACOF IV. We also recently made a significant investment in American tire distributors, a market leading franchise with significant expansion potential. With current enterprise value multiples on the high end, we seek to identify cash flow enhancing and growth opportunities in businesses where we have significant platform expertise and a sourcing or due diligence edge. Since it’s on everybody’s mind, turning quickly to our energy exposure, remember that the team that joined us from EIF invested in assets in power generation, transmission and midstream energy. Historically, we have invested in the oil and gas industry in our core flexible capital strategy and within ACOF IV we do have two E&P equity investments, both of which are well protected from recent volatility given their hedge positions and strong balance sheets. Going forward, we are very focused on potential oil and gas investment opportunities. Consistent with our historical approach, we have formed a working group across the firm to collaborate on opportunities across asset classes and initially we’ve taken some selective total discounted debt positions in core assets post the fourth quarter price dislocation. Within US power and energy, the $4 billion in newly acquired assets that we manage are very well insulated from oil and gas price fluctuations due to the use of long-term contracts or financial hedges. Our group focuses on making long term stable cash flowing investments primarily in different forms of power generation, but they also make investments in transition and midstream assets. And now that the EIF acquisition is closed, we expect to raise funds focused on our new energy infrastructure strategy in 2015. In our PE strategy in China, we have sponsored a number of established growth companies, two of which access the public markets over the past year and a half. We did experience some volatility in a few public positions created on the Hong Kong Stock Exchange late in the fourth quarter as that market and those particular segments within the market experienced some volatility. Fortunately we did take the opportunity to realize a portion of our gains in that portfolio as one of the positions rebounded during the first quarter. Going forward, we expect to raise additional growth capital for our China-focused strategy. And last but not least, our real estate group managed $10.6 billion at year end in both US and European real estate private equity and debt. Our real estate private equity team focuses on investing in commercial properties in core markets that have been under managed or are in need of repositioning. In the US, we continue to exploit the current wide disparity in property values among sectors and markets. And the uneven recovery in Europe provides unique opportunities for value although we remain very selective with the focus on healthiest economies with declining unemployment and tight fiscal policies. On the debt side, we provide flexible and value added debt capital to owners and operators repositioning commercial real estate. Market fundamentals and the inflow remain strong, but proprietary origination is important so we are leveraging our broad footprint in an expanded number of property sectors to drive a wider opportunity set. Overall, we deployed about $1.3 billion in real estate investments throughout 2014 with approximately $800 million in debt and $500 million in equity. On the fundraising side, during the fourth quarter, we held final closings for our fourth European opportunities fund and our eighth US value add fund, both ahead of targets raising $1.3 billion and $800 million respectively. We have also begun marketing our opportunistic strategy in the US and our value enhancement strategy in Europe. We also demonstrated strong momentum in our global debt platform with the closing of two new real estate debt mandates, a $700 million separately managed account investing in US commercial mortgage loans for a North American insurance company and a $242 million mandate focused on the European markets for a large institutional investor. Going forward, we believe that we remain well-positioned for additional managed account mandates in real estate lending. If you turn to slide 5, we believe it’s a good summary of our fundraising activities by group for the full year 2014. The $16.5 billion of gross new capital was led by new funds in tradable credit, real estate and direct lending. Note that we did not raise any capital within our private equity group for the year. Turning to slide six through nine, you can see that our AUM increased approximately 11% for the year or 16% including the EIF transaction. Over the last decade, our AUM and associated management fees have increased every year, in part as our investors have been attracted to our strong performance, but also due to the long lived capital that we manage. In 2015, we are well positioned with available capital to invest of $18.2 billion up from $15 billion at the end of 2013. And of this amount, $9.2 billion is eligible to earn management fees which will provide approximately $92 million in incremental annual fees upon deployment. This pipeline of potential fees coupled with our future fundraising opportunities gives us the potential to increase both our management fees and fee related earnings into 2015. So lastly, before I turn the call over to Dan, I just wanted to make a few short comments about our financial results. Our full year management fees and FRE increased year over year by 19% and 7% respectively on a comparable basis, excluding $15 million in previously deferred fees that were recognized in 2013. And while the 2014 growth rate in our fee related earnings was slower than the growth than our management fees, who hope to drive operating margin efficiencies gradually during 2015 as we invest our available capital primarily with our current investment teams in place. Despite the relatively steady fourth quarter fee related earnings of $40 million, our fourth quarter ENI, or economic net income, after-tax per unit was down compared to the prior quarter at $0.27 versus $0.32 as our net investment income was impacted by the late December volatility in our unrealized public holdings in ACOF Asia and to a lesser extent by the lower performance related earnings caused by weaker loan and high yield markets I discussed earlier. Fortunately, this market volatility had no meaningful impact on our realization activity and therefore we generated consistent gas distributable earnings in the fourth quarter compared to the prior quarter, translating into $0.24 per common unit distribution for Q4. And now, I’d like to turn the call over to Dan Nguyen, our CFO, for a more detailed review of our earnings and financial position. Dan?

Thanks, Mike. For those of you in our earnings presentation, I will reference our results shown on slide 9. As a reminder, we generally approximately 89% of our total fee income from management fee derive from a diverse set of approximately 150 funds and accounts. For the fourth quarter, we generated management fee and fee related earnings of $161.1 million and $40 million respectively, a comparable growth rate of 15% and 14% over the prior year period. For the full year, we generated comparable management fee and fee related earnings growth of 19% and 7% respectively, after adjustments for the $15 million of previously deferred fees recognized during 2013. Our fourth quarter fee related earnings of $40 million was roughly flat with the third quarter level of $41.2 million. Looking forward, we expect that our fee related earnings will gradually increase throughout 2015 as we add EIF, deploy capital and receive fee paid on invested capital against a slower growth rate in expenses and as we raise new funds where we are paid based on committed capital. The net investment income component within our performance related earnings was impacted by and realized losses in our ACOF Asia portfolio and slightly negative returns in some of our tradable credit portfolios as loan and high yield market indices were also slightly negative for the fourth quarter. Fourth quarter performance related earnings was $24.7 million compared to $30.8 million in the third quarter and $65 million for the comparable period a year ago. For the full year, our performance related earnings was $141.9 million compared to $176 million in 2013, reflecting lower incentive fee and investment income primarily within the tradable credit group as our strategies earned lower rate of return compared to 2013. While we have seen some periodic volatility in our performance related earnings as evident by some fluctuation in the last two quarters of 2014, our PRE is a smaller component of our economic net income compared to our peers. In addition, we believe our relatively higher mix of credit driven performance fees should result in less volatility throughout a business cycle compared to peers with larger private equity businesses. Our fourth quarter pretax economic net income of $54.7 million was below the $72.1 million we generated for the third quarter due to the lower net investment income described earlier. On a per unit basis, our economic net income net of tax was $0.27 compared to $0.32 for the third quarter. If you turn to slide 16 and 17, I will review our fourth quarter distribution and our balance sheet. As Mike stated, the reduced level of fourth quarter realized investment income had no impact on our distributable earnings. Our fourth quarter distributable earnings of $64.6 million remain relatively consistent with the third quarter level of $65.3 million. Importantly, our fee related earnings represent 62% and 53% of our distributable earnings for the fourth quarter and for the full year. Our fourth quarter distributable earnings attributable to common unit holders was $0.26 per common unit net of tax. And our fourth quarter distribution of $0.24 per common unit translated into approximately 90% of our distributable earnings. The fourth quarter distribution will be paid on March 24 to holders of record on March 16. Looking forward, let me highlight the component embedded within our distributable earnings. Although the high percentage of FRE in our distributable earnings provides greater capability for our distribution, we have historically experienced high realization within our tradable credit and direct lending funds during the second half compared to the first half of the year. This is primarily due to the nature of our funds and certain tradable credit and direct lending fund, pay incentive fees annually and typically realized in Q4, including ARCC which realized Part 2 capital gained incentive fee during Q4 as well. Turning to our balance sheet, we continue to have $1 billion plus revolver credit facility available for future capital needs with a modest net debt position of $97 million. Our investment portfolio which we believe will provide attractive source of investment income to our unit holders over time was $594 million at year end. In addition, our accrued but unpaid net performance fees receivable was approximately $157 million at the end of the year. On January 1, 2015, we closed our acquisition of EIF which we expect will be accretive to our earnings per unit and we began generating management fee on approximately $4 billion in fee earning AUM at a current blended rate of approximately 1.5%. We did not acquire any balance sheet investment or raise any incentive fee on the existing four funds that are now managed as part of the transaction. Now, I’ll turn it back to Mike for some closing thoughts.

Great. Thanks, Dan. So, in closing, we believe that we are very well positioned for growth in our AUM and fee related earnings in the year ahead. Supporting this view is the expansion of our investment platform into new complementary strategies, the size and breadth of our fundraising pipeline and our ability to drive efficiencies in our operating margins. Our balance sheet and access to capital also gives us great opportunity to expand our business with accretive acquisitions like EIF. As we head into a potentially more volatile investment environment, we like how we’re positioned. Our investment strategies give us the ability to be flexible so that we can take advantage of investment opportunities when market volatility increases. And while performance related earnings may fluctuate in volatile markets, the same volatility improves investment opportunities in the market. This should set us up for potential increases in deployment, management fees and fundraising given the nature of the strategies that we manage. And so while there will be quarterly fluctuations, no doubt, our goal continues to be to offer our unit holders a relatively stable level of distributions, built around our high composition of growing fee related earnings and supplemented by the realized components of our PRE. And that concludes our prepared remarks. Thanks everyone for your time and support. And operator, if we could open up the line for Q&A, that would be great.

[Operator Instructions] And our first question will come from Chris Harris of Wells Fargo.

So a couple of questions about the investing backdrop, first off, I don’t know if I caught it or not, did you guys say exactly how much you invested this quarter?

Meaning Q4 of 2014?

Correct.

Yeah, I think we didn’t drill down, we gave you full year numbers, but generally I think we had a fairly good investment pace in the fourth quarter in tradable credit and direct lending which is where you saw the bulk of that deployment.

Curious regarding the outlook for 2015, it sounds like you guys are fairly optimistic about the investing pace, I know you made some comments about growth in fee related earnings, what gives you guys the confidence that you’ll be able to have a pretty decent investing environment this year, is it just that you expect some volatility to pick up, is it new areas that you are targeting like oil and gas or is there something else you’re thinking about?

I think it’s all of the above, Chris. So we talked a little bit about the fundraising pipeline and as you heard in the prepared remarks, we have meaningful fundraising initiatives going on in each of our businesses and those funds which is consistent with the hallmark of the firm are flexible to invest throughout the market cycle. So you’ve seen this in our direct lending funds where we are able to do rescue loans, we’re able to do par senior lending, par mezzanine lending in our dynamic credit strategies, we’re allocating between high yield and senior in our special six funds which we’re having great success with, lots of flexibility. And in our core private equity funds, as you know, we have the ability to do regular way buyouts and gross capital investing as well as distressed for control. So the confidence is really rooted on the capabilities of the firm to invest up and down the balance sheet across geographies and asset classes and really capitalize on volatility. But it is also supported by the nature of the funds that we manage, which give us the flexibility to invest regardless of the market environment and particularly to take advantages of the volatility. So we are thrilled as we sit here today to have $18 billion of dry powder to invest and as I mentioned, lots of funds on the horizon which should continue to give us the liquidity we need to take advantage of the market.

Just as Mike mentioned, across our four businesses, it’s really – you become optimistic in your ability to put money to work when you have a good pipeline and we have a really attractive pipeline whether in our private equity – corporate, private equity, power and energy, private equity real estate that pipeline and investment pace is very attractive for us. As Mike said, direct lending in tradable credit similarly so. So again, I think all four of our businesses is really attractive pipeline of investment opportunities today from where we sit and we are seeing that in our investment base.

Quick follow-up on the P&L, on the expenses, things were actually a little bit higher than we thought this quarter, maybe you guys are guiding to a slower rate of growth in the expenses for 2015, any way to kind of frame up that guidance a little bit more maybe on a percentage basis what you might be expecting for G&A costs and comp this year?

We don’t provide guidance, but we said this on prior calls. I think the scalability is coming from two places. One is the front office and if you go back to the dry powder commentary as we talked about of the $18.2 billion of dry powder, $9.2 billion of it is yet to our management fees, or said differently, we only earn fees upon deployment and we are pretty confident that we don’t need to add any new people in order to deploy the capital. So you get a natural scaling as those funds get deployed with the existing teams in place. And then the second is we’ve been putting a lot of focus on the middle and back office making sure that we have scalability and efficiency, and I think you will start to see that absorption show up throughout the course of 2015 as well. What we have said in the past place we think that there is a pretty easy 200 basis points to 300 basis points margin opportunity right in front of us and as the business continues to scale, I wouldn’t be surprised to see that opportunity continuing to increase.

Let me ask you this, was there any seasonality that impacted the expenses this quarter or no, it’s just normal course of growth?

I think we see a little bit of seasonality vis-a-vis some of the year end comp and year end cleanup initiatives. So a little bit, but I wouldn’t say there was a material difference.

I’d just say we’ve been a public company now for nine or 10 months, our FRE will go up considerably in 2015 and our FRE margin will go up, as Mike described, in 2015 as well.

Our next question will come from Ken Worthington of JPMorgan.

First in tradable credit, there was a lot of mention of opportunities in energy, so I guess how big a part the 4Q investment were energy investments? And as you look for to the opportunities, is energy getting better or is the opportunities starting to lessen at all? And I’m sorry, this is a very far fledged, I want to ask it anyway. If energy continues to remain attractive, are there any concentration limits that would somehow limit your ability to take advantage of energy opportunities in major products or across tradable credit? I know it’s far fledged, but I wanted to ask.

I think we should answer that with both may be Greg Margolies for tradable credit and Bennett Rosenthal for private equity, both of whom have been focusing on the energy space.

I’ll start, it’s Greg. We certainly use the corrections in the markets in the fourth quarter to go into – increase our energy exposure, we are still underweight energy, generally speaking, underweight energy certainly aren’t on the services side and the E&P side which was the hardest hit sectors going into the correction. And because of the dry powder we have across the platform both in long only and alternatives we use the fourth quarter as a buying opportunity. We’re doing it gradually and thoughtfully, which is obviously the most important thing, it’s very, very credit specific and that’s critical, you can’t just buy the market, you have to be very credit specific in terms of where you’re playing in the space. We are nowhere near, we are absolutely nowhere near any kinds of caps, we still think there is lots of opportunity in the energy space that will play out over time and also most importantly on the tradable side, there is been a tremendous volatility in that space as oil has fluctuated considerably over the course of the last four or five months as has the forward curve. And so what we are seeing is, because of the lack of liquidity provided by the street, there have been buying opportunities and selling opportunities, all, probably three or four round trips over the course of the last four or five months and we’re utilizing the opportunities in both directions depending upon the funds we are in. Bennett?

In private equity, we’ve taken a couple of different approaches to the opportunities in energy. As you would expect in a market where debt is traded off and we have a perspective on companies that we like and could potentially get access to investing in those companies through the debt we have taken a couple of toeholds as I believe Mike mentioned in our remarks at the beginning of the call, we have seen the market trade up, so we’re not as aggressively buying today in the private equity business, but we do have established toeholds. And from the other side of it is investing behind management teams to take advantage of the market. So we have two platform companies that have relative dry powder to invest in the space and expect to get several opportunities, we’re pursuing several opportunities in this space today behind the management teams we back. So we do look at it as having some constraints at some point, but we are nowhere near that constraint yet.

And then on ACOF, I think you mentioned ACOF Asia had some Chinese marked rate of returns, can you talk about ACOF III, how did the investments do in 4Q, and maybe what’s working and what’s not working in that fund?

So ACOF III and ACOF IV, which I think are both substantial portfolios are both doing well. Across those funds, you saw substantial improvement in the fourth quarter. The places where we didn’t do well are actually some of the underground energy investments in ACOF III, and they were not meaningful, the portfolio was up substantially and I would say just to give you round numbers, the losses on the energy stuff relative to the gains is probably 20%, 30% on a net basis. So ACOF III is still doing very well. If you look at our overall private equity portfolio, we had revenue and EBITDA growth both double digits across the portfolio in the fourth quarter. I think we have answered your question.

And our next question will come from Michael Cyprys of Morgan Stanley.

So it looks like you’ve had some impressive fundraising results here in the quarter in real estate in particular, what can we expect over the next 12 months from real estate? And could you talk to how you are building out the real estate franchise and the opportunity that you see in any particular sizing?

I think in 2014 we had two funds that both closed in excess of their targets, our US value add fund closed at approximately $825 million with $700 billion target. European opportunistic fund four actually closed at approximately $1.3 billion with an approximately $1 billion target, and similarly in 2015 we expect to do, if you will, a US opportunistic fund and European value add fund. But please understand the strategy in real estate are those four products, if you will. US and Europe opportunistic and value add generally, shall we say, 18% type returns net to the investor in the opportunistic space, 12% type net returns in the value add space, both US and Europe, both leveraging our teams on the ground and the private equity businesses being complemented by a real estate debt and direct lending business in this space.

Mike, not to belabor, but I’d encourage you to maybe think about our corporate business and the historical track record there as a framework for how to think about how we see the opportunity in real estate. And if you look at the 17-year history of the company, we have learned that running private equity, direct lending and tradable credit alongside each other in a collaborated integrated way drives huge value in terms of deal flow and diligence and capital markets access, information advantages. And as Tony just described, if you look at what we have now built in real estate, we have the ability to invest at every level of the balance sheet from debt down through to control equity positions in multiple asset classes and geographies. So while we had a very impressive real estate business, I think now that all of the right pieces are assembled, some of the momentum that you’re seeing is a recognition of that integrated approach to the market is starting to take hold.

And is there any particular sizing that we should be thinking about for the US opportunistic and European value add fund that you’re looking to do in 2015 or is it too early?

I think it’s too early to tell, we’re seeing great demand for both of them, order of magnitude they will both be $0.5 billion to $1 billion type fund raises, I think, when all is said and done.

And then just as a follow-up, in your conversations with institutional investors, the you have a sense for the magnitude to them taking up allocations to alternatives, in particular to alternative credit and alternative real estate strategies, given this extended low rate environment in Europe and how is those conversations compared versus six months or 12 months ago?

I think, of course, it’s always dangerous to generalize when you have so many conversations with large institutional investors. But it’s fair to say that the low interest rate environment continues to make large global fixed income investors very, very active in their search for additional yield, but yet not capable of meaningfully increasing their global equity portfolio. And what we are seeing is that meaningful increase in alternatives i.e. both real estate and alternative credit products, again, as an opportunity to substantially increase returns in their fixed income portfolio without substantially increasing the risk, in fact if you think about it, most of our credit businesses are earning two times or so, more than twice the return of a traditional fixed income portfolio but yet predominantly floating rate, i.e., less exposed of course to interest rates. So the alternative credit products that we are offering are growing and becoming far more interesting, if you will, to the traditional fixed income investor. On the global equity side, obviously, lots of folks particularly if they’ve been invested in US equities are pretty happy with their performance, global equity investors are pretty nervous about volatility and that’s of course where the increase in exposure to private equity comes from and we’ve seen a continued improvement albeit, I don’t know if it’s good or bad, I think it’s good for us, but albeit with many of the large private equity investors trying to limit the number of relationships that they have in this space.

Our next question comes from Doug Mewhirter of SunTrust.

Just had one question, most of my other ones have been answered. In your tradable credit, generally the liquid credit funds, obviously it dampened down your performance-related earnings, and a lot of that is due to the market fluctuations. So given the fact that most liquid loan markets have done very well in the quarter to date in the first quarter of 2015, do you see some of your funds getting back into sort of that incentive zone or incentive fee zone that they fell out of in the fourth quarter?

I’ll let Mike or Dan speak to the incentive fee zone, but I would absolutely agree both leverage loans and high yields on a year to date basis have done quite well. And if you look across the board and our performance across our long only as well as our alternative funds on a year to date basis, first quarter is going very well and we’re outperforming pretty much across the board, both again from the index driven as well as the absolute return funds. So we’re seeing a very good start to the year.

And I’m showing no further questions. I would like to turn the conference back over to Michael Arougheti for any closing remarks.

Great. We have none, so we just wanted to reiterate our thanks to everybody spending so much time with us today and for all your support. And we look forward to speaking again next quarter.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.