Welcome to Ares Management L.P.'s First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Tuesday, May 10, 2016. 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 first quarter conference call. I'm joined today by Michael Arougheti, our President; and Michael McFerran, our Chief Financial Officer. In addition, Greg Margolies and Kipp deVeer, the Co-Heads of our Credit Group will also be 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, please note that the performance of and investment in our funds is discrete from the performance of and investment in Ares Management L.P. 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 and Form 10-Q that we filed this morning for definitions and reconciliations of these measures to the most directly comparable GAAP measures. Our first quarter earnings presentation has also been filed with the SEC and is available under the Investor Resources section of our website at aresmgmt.com and can be used as a reference for today's call. I would like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any securities of Ares or any other person, including any interest in any fund. Before I turn the call over to Michael Arougheti, I will provide a quick recap of our first quarter earnings. We reported economic net income after tax per unit of $0.08 compared to $0.35 for the same period a year ago. Our distributable earnings for common unit were $0.15 per common unit and we declared a distribution of $0.15 for common unit holders of record on May 24th and payable on June 7th. I will now turn the call over to Michael Arougheti.

Great. Thanks Carl, good afternoon everybody. Since our last earnings call at the end of February, liquid credit and equity markets continued to recover following what was a volatile start to the year. This was driven by signs of less restrictive Federal Reserve policy, a continued recovery in commodity pricing, and a more stable global growth outlook. I remind you that volatile markets often create excellent investment opportunities and play into Ares strength as a long-term opportunistic investor with locked up capital. As affirmed, we have made some of our best investments during distressed and dislocated markets. Our patient and flexible approach has allowed us to establish or add two positions during this periods, enhance value over time and then realize better outcomes once market stabilize. However, the flip side is that volatile markets can impact market prices and constrain realization activities in the short term. We weren't immune to these market forces during the first quarter. Our economic net income was reduced due to some mark to market unrealized depreciation on certain positions and our distributable earnings reflects slower realization activity. As a result, our fee-related earnings, which were not reduced by market volatility, comprised an even greater portion of our distributable earnings for the first quarter as compared to prior periods. Importantly, fundamental portfolio company and asset performance remained very strong. We continue to be pleased with the core drivers of our business across fund raising, investing, realizations and fund performance and let me walk you through these in order. So on the fundraising front, we're coming off of our most successful stretch ever with approximately $23 billion in gross capital raise in the last 12 months. Our most significant fundraise was our over-subscribed fifth flexible capital private equity fund, Ares Corporate Opportunities Fund V, or ACOF V,…

Okay. Thanks, Mike, and good afternoon, everyone. As Mike stated, like others in our industry, market volatility had an impact in our first quarter performance related earnings with unrealized marks on our assets, but we view these market price fluctuations as a reference to evaluate at a point in time, not necessarily a reflection, a fundament performance. We are much more focussed on using volatility as opportunity for long-term value creation. We believe these fluctuations are often caused by investors, short-term time horizons and provide investors like Ares the ability to take advantage of purchasing franchise assets at better values. Looking forward, we are sitting with a sizable backlog of shadow AUM that we expect will generate a meaningfully higher level of run rate management fees than our first quarter's level. That said, a more significant portion of the earnings benefits from the deployment of our shadow AUM, will likely be realized more fully in 2017 and 2018. Let me explain how the deployment of our shadow AUM and the impact from our business expansion could be reflected in our fee-related earnings trajectory. We continue to invest in new products, business development professionals, distribution and infrastructure that we expect will help us increase future value for our unit holders. However, these investments carry expenses that are borne largely upfront with future revenue and earnings payoffs coming in the future periods. For this reason, we may experience flattish fee-related earnings over the near time until such time as we deploy our shadow AUM, including beginning to investment period for ACOF V. As a reminder, we will not be getting earning fees on the $7.6 billion in committed third party capital in ACOF V until it begins its investment period upon in its first investment, at which point there will be a…

Great, thanks, Mike. I know we just covered a lot on the course of the call and describing our recent accomplishments and where we are today. So maybe just to sum it up, we feel very good about how we're positioned and the opportunities that lie in front of us. Capital raising has been very strong, most notably with the recently announced $7.85 billion final close on ACOF V. We are continuing to expand our LP base and working on new funds and separate account opportunities with existing and prospective investors. Our deal sourcing and diligence capabilities continue to translate into strong fund performance and deployment. We have record dry powder and shadow AUM. We believe that we remain well positioned to review M&A opportunities, which we believe will increase as we enter the next economic cycle and I think most importantly we are leveraging the power of the entire Ares platform across all of our activities and our investment in operational teams in order to execute on our long-term business objectives and strategic vision. And with that we'll thank everybody for their time and thank our investors for the continued support. And operator, we'll open up the line for questions.

Thank you. [Operator Instructions] And our first question will come from Mike Carrier of Bank of America Merrill Lynch.

Hey, good morning. This is Mike Needham in for Mike Carrier. So looking into the gap between incentive eligible AUM and incentive generating AUM, can you give us an idea of the timing and the drivers to close that gap and whether its assets are getting deployed? And then I think you mentioned $15 billion of assets are within around 1% of their hurdles, does that include both ARCC and then AEZ, like 10 billion of assets at the ARCC?

Yes, I think I’ll start with the second part of it, the $15 billion we mentioned that was within 1% of the hurdle rates does include the ARCC, which was $8.8 billion of that number. With respect to the difference between -- I think you were asking how much -- what's the timing to move from incentive eligible not yet earning fees to incentive generating. If you take a look at it, we have $47.9 billion eligible, of that $10.6 billion is earning fees. The difference of $37.3 billion we will put into a few buckets. The first is the $8.8 billion of ARCC that we talked about, another 50% of that number represents capital that's actually not invested yet, that as we talked about will be put to work over the next couple of years. The rest of about, let's say another 25% of that total or $37 billion represents amounts that are below the hurdle of which the majority of those are represent amounts that we think are reasonably closed to the hurdle with only a small amount of frankly less than 2% of our total incentive eligible AUM that we think is at a pretty good distance from its hurdle.

I think Mike if you go to the earnings release and the attached presentation, you'll see a breakout of that on page 7.

Yes, okay, got it. Thanks. And then just a question on fundraising, you noted that existing clients drove your strong fundraising over the last year and wondering if you can just drill down into what types of clients are driving the flows then two other areas, one separate accounts where the demand is coming from in terms of client type and strategy. And then the second is, didn't see a CLO called out on the commitments page, and just wondering what the outlook for -- I think you did like 5 last year.

Sure. I'll answer the first part and then I'll let Greg come in generally on the state of the CLO market. But as we said in our prepared remarks and we've been pretty consistent over the last couple of years, the global demand for alternatives is growing. We're seeing it from all corners of the globe and all corners of the investing community, largely because people are frustrated with the returns that they're getting in their fixed income portfolios today given the yield environment that we're in or they're frustrated with the volatility in returns that they’re getting in the global equity markets. And so one way to think about this from an institutional investors perspective is if you are a pension fund or an insurance company with an actuarial payout requirement of somewhere between 6% to 8% based on traditional portfolio allocation methodology and model you're probably struggling to meet that boggy and that's where alternatives are becoming an increasingly important part of the allocation solution. Similarly if you’re a high net worth or traditional retail investor who is planning for retirement and watching a shift from defined benefit to defined contribution, you too are starting to think about how you get yield and not surprisingly you're focussed on a 6% to 8% type of return as well. So what's interesting is when you look at where the allocation is coming from, we're seeing an increase in the number of institutional investors across every investor type, we're seeing an increase in retail, both traditional and high net worth for the types of products that we manage. And your last question, what we're also seeing is a consolidation of assets in the hands of fewer skilled managers and that's what driving this cross-platform investment trend. And so when you talk to the large institutional investors, they’re trying to drive efficiencies in their business, they’re trying to reduce friction cost and how they're allocating between different alternative asset classes and so to get on to a platform like ours where you can invest with an infrastructure and an investment philosophy that you trust, not surprisingly you'll see private equity fund investors transition to be credit platform investors and that's really been the trend. So when we talk about 80% of our existing investor driving our last 12-month fundraising, that's in sequential re-ups on existing strategies. But I think, as importantly, a move towards multiple products across the platform. And for the largest of those investors, the SMA is becoming a much more prominent part of the conversation where folks are trying to get, much more dynamic access to what we do where they can, for example, give us a large managed account that allows us to invest in both liquid and illiquid credit in direct lending structured credit, tradable credit, etcetera that gives us just a much more dynamic portfolio allocation. With that Greg, just a comment maybe on the lack of CLO fund raising, what's going on there?

Sure. Thanks Mike. We certainly expect there to be continued CLO fundraising from a platform over the course of the balance of this year. What we are focussed on there was finding the right arbitrage situation, i.e., a great place with liabilities, at which point we’ll certainly be looking to raise those. We have both debt and equity investors lined up. We're really just looking to get the right returns for our investors right now. The markets are beginning to open up on that side, so we do expect to see that opportunity increase over the course of the balance of the year. I think what's interesting is that the risk retention rule changes in both the Europe and U.S., but certainly working in our favour, in that it will decrease the number of CLO managers out there and we're begging to see -- we're starting to see in the end of last year and it's accelerated this year in terms of the number of CLO managers that are up for sale. And like anything else, we're certainly looking at those opportunities and we'll figure that out over time, but I think we'll continue to see the consolidation that plays in our favour over the course of this year and next year in terms of new fundraising and consolidation in the space.

Okay, great. Thanks for taking my questions.

Thank you.

The next question comes from Ken Worthington of JPMorgan.

Hi, good afternoon. First on ACOF IV, if I'm right, it appears to have fallen out of carry, what investments in that fund are weighing on returns there? In fact, I'm reading it did fall out of carry. And then how much would the remaining investments have to appreciate to get the fund back into carry?

Sure. The actual return on ACOF IV was effectively flat quarter-over-quarter. I want to say it was down about 1%. So it's not really a matter of investments weighing on it. It's when we entered the quarter, if you look at the way IRR works, we're close to the hurdle rate, just from passage of time, the fund is still in its investment period, earnings fees are committed. So even if marks are just completely flat quarter to quarter, what you would see from an IRR calculation standpoint is the IRR come down and that's what brought it below the hurdle rate. I think it's disclosed in the 10-Q in the MD&A where you'll where we were on an IRR for the quarter was just under 8%, the hurdle is 8%, so it's just right at the threshold below it. What I would want to highlight is, as we sit here today, our vast belief if we would be back above that hurdle rate if we were to mark that portfolio as of this month.

Okay.

And I mentioned in my prepared remarks, the realization activity has begun to take up after what was a pretty slow first quarter. So I think that will cross over pretty quickly.

Okay, great, makes sense. And then as we think forward to ACOF V, that you mentioned that you'll turn on the fees once the first investment is made. If I look back at ACOF IV, looks like two thirds of the portfolio was invested right now. Given that level of investment, is ACOF V more likely to be turned on in 2016 if market conditions are normal or is it sort of a no brainer that it would be 2017? I guess you just -- you guys have a better sense of pipeline and stuff than we do, I couldn't figure that on my own. Thanks.

Yes, as Mike said in his prepared remarks, it's really going to be a function of the market environment that we're in. Our best guess today as we look at the market environment we're in is it would be towards the back-half of 2016 in all likelihood, hard to see it slipping to 2017, but again it's going to be market dependent.

Okay, great. Thanks very much.

And the next question comes from Craig Sigenthaler of Credit Suisse.

Thanks. So just first on the improving realization commentary for 2Q, are there any specific funds that you've this increase or is it pretty broad based given how bad January and February were for [indiscernible] versus overseeing here in April-May?

We're seeing it more broadly, specifically we are seeing it in private equity and in our credit strategy especially as we have some oversea loss that are getting towards the end of their life that have some build up fees that we realize [indiscernible]. But I think across the board we’re seeing increased realization outlook for the second quarter but also the highlight for third quarter as well.

Got it. And then if you look at Slide 4, and maybe you covered this a little bit earlier but I wanted a little more detail on it. What funds do you expect to be bigger contributors on the fundraising front over the next 12 months given that ACOF V just had its final close?

Yes, so as we’ve talked about, we have a queue, what I would call successor funds that are still in the market and finishing out fund raising. ACE III, which is our third comingled European direct lending fund, has raised $2.1 billion to date that should be closing out here in the near future. With regard to our private equity business, our fifth energy and infrastructure fund is in the market and in an area of focus for investors. And then my expectation is, just based on timing, that we would start to see the new generation of European and U.S. real estate funds come to market as well. What’s not necessarily shown on Slide IV but is really going to be a big rider through the rest of '16 and '17 is the separately managed accounts that we reference earlier, that continues to be a big area of focus for us and the amount of inbounding that's coming across the platform has been pretty significant.

And Michael, on that, what about ACR II or real estate debt II and what about ARDC II, the credit opportunity II fund?

So right now ARDC, obviously a publicly traded closed-end credit fund, the new issue market for closed-end credit fund is effectively closed and you can look at where ARDC trades despite some very good fundament performance and dividend stability. Whatever demand would find its way into that strategy and the public market right now is translating into some of this demand for diversified credit exposure through some of the managed account conversations that I referenced. In terms of ACRE, I think as people know is our publicly traded mortgage REIT. We continue to grow the commercial real estate lending business largely through managed accounts given where the mortgage rates is trading as well.

Got it. Thank you.

And next we have Michael Cyprys from Morgan Stanley.

Hi, good afternoon. This is Nick Stelzner filling in for Mike Cyprys. Just a question on SSLP, how much more of a reduction in leverage in pay down of loans in SSLP should we expect from here? There was a bit of a headwind in 1Q to asset growth. So just what are the opportunities I guess that's being positive going forward?

Yes, I'd also refer you to some of the comments that Kipp made and he's here, he can chime in on the ARCC call. But if you look at the reduction in AUM, if you will, over the last 12 months, from the unwind of our global partnerships with GE, it was roughly $7 billion. If you look at it in the quarter, it was roughly $1.3 billion. Understand though that that’s largely showing up as potential impact to ROE in ARCC. I think Kipp and the team at ARCC have done a tremendous job continuing to maintain the earnings trajectory of the BDC in the face of what's now the one-year anniversary of the leverage unwind. So while I think that that's been on investor's mind, the company is demonstrating the ability to continue to deliver the dividend stability despite the deleveraging. As it sits today, the pace of deleveraging has been slightly slower. We talked about that on the earnings call. I think there was an expectation coming into the New Year that there would be a slightly quicker pace of refinancing and just given the market environment, that slowed. And so as a result, the Q1 ROE on the SSLP asset was actually slightly higher I think than market expectation. It's been orderly, it’s been something that we've managed well. Given the size of that program, there's about 38 borrowers in it now from a peak of 54. We would expect it would continue to wind itself down over the course of the next two years. The other thing that we talked about was the market as we continue to explore ways to accelerate the resolution of that program given the rampup in our new joint venture partnership with AIG and Varagon and those discussions are ongoing.

Great. Thanks for answering the question.

[Operator Instructions]. Our next question comes from Doug Mewhirter of SunTrust.

Hi, good afternoon and good morning. Follow-up question on ACOF V, it’s a little speculative, so I'm not sure if you can really answer it very specifically. But would we expect to see the pace of investment in ACOF V increase or decrease if the market, if the stock market dropped a lot? So I would imagine that you might be tempted to -- you might get better prices and want to be more aggressive if the market dropped but maybe the other players, like the people giving you financing maybe more reluctant because of the volatility or people may be less willing to sell. Just if you could help me understand the dynamic there of how you -- your appetite for capital development depending on where the stock market is?

Yes, I think that I’ll try to take it away from the stock market specifically because I didn't understand why there is stock market volatility, there could be different reasons for that. I would just remind everybody what we do in our private equity business because it is somewhat unique. In our private equity business, within the same fund, we will make growth oriented buyout investments, either in platforms or regular way buyouts, largely focused on companies where we can drive values through cash flow growth as opposed to maximizing leverage. And we will execute on distress for controlled investments, typically taking toe holds when there is market volatility in the dead capital markets. And then ultimately acquiring control of companies, largely in consensual deals through the balance sheet. So when you look at our track record, what is unique about it is we have the ability to make really good returns across the cycle in a different market environments. We have the ability to be much more level set in our deployment haste just become we're not dependent necessarily on the availability of leverage or the ability to take public companies private when the evaluation environment changes and so as a result, irrespective of fund size, if you go back and look at the track record both appointment and realization, I will tell you has been much more consistent than your traditional middle market buyout fund. My opinion generally though is that if we get into a period of heightened volatility or distress in the capital markets, that's your stock market, momentary that usually a great time to deployment. And so I think the opportunity has a vague COF V, particularly how late we are in the credit cycle, it could be a very good one.

Okay, that was really helpful. My second and final question. Powder dust were asking another possible spectate of question. You've done a good job of sort of showing your dry powder and your potential for increasing your fee-earnings as the new management showing that pipeline, largely because you've had such a tremendous AUM growth. Given that we -- looks like we have a pretty steady pace of liquidations now and maybe your -- you have a higher hurdle to jump over. Can we expect meaningful net AUM growth in 2016 and 2017, meaningful being anything above low single digits percentage?

Its' a difficult question to answer if you look at the history of the firm through market cycles we have been able to generate AUM growth of 15% to 20% pretty consistently. We are coming off and it's not lost on people hopefully. We are coming off a significant period of fundraising across each of our businesses. The good news is we've got very health deployment and so we’re coming back to market more frequently despite the increasing size of our successor funds. So I always have difficulty talking about what's meaningful or what's not meaningful. But if the question is, can we continue to grow the AUM in the low to mid-single digits, I think that's an evidently achievable goal despite the fact that we are coming off of a big capital raise in 2015.

Okay, great. Thanks, that's all my question.

And our final question today will come from -- is a follow up from Craig Sigenthaler of Credit Suisse.

Hey, thanks again. I want to circle back on M&A and back in 2008 you guys did a a very creative merger with ARCC and Allied and I heard your earlier comments on the CLO market, but how are you generally thinking about M&A today, given higher regulatory pressures on smaller firms?

Sure. We think about it a lot. As we've talked about, we have a pretty consistent view on M&A and if we're going to do something, it has to make strategic sense, make us better at what we do and make them better on what they do. It has to be financially accretive and it has to be a good cultural fit. And I think you've seen us over the years, successfully make acquisitions and you've seen us over the years walk away from acquisitions where we couldn't check all of those three boxes with conviction. I think we’re going into a period whether it's risk retention, the regulatory headwinds that the banks are facing, the capital markets access that some of our smaller competitors are facing, the early signs of credit distress in certain books. There are a lot of catalysts out there for M&A that I think are starting to lead to some really interesting conversations for us. So we think about it a lot. We're always looking. We're always evaluating, but we do have a very high bar in order to actually execute on a transaction. I'd reference the other comment I made earlier just about the consolidation trend in alternative asset management, generally that's not just a function of organic flows from institutional retail investors, it's very much going to be a function of M&A opportunities as well. So I think that's going to be a continued part of the story.

And then just a follow-up, can you give us any color on the three new first generation funds that you referenced earlier on the call.

I'm sorry some color on some of the new types of strategies that we're working on?

Yes, so earlier in the call you said there is three new first-generation funds, maybe adjacent funds that you guys are planning on launching. I was just wondering if you could help us in terms of what asset or product classes those fund would be at?

Sure, I don't -- I may have not articulated well, but I don't think we said the number three, but we are working on number of adjacent strategies. A good example of that continues to be growth in our commercial financial business, which is with an outgrowth of our core cash flow direct lending franchise that business continues to raise capital and scale. We are working on some interesting public equity strategies where we are trying to take advantage of some of the distressed and yield stocks generally given our experience in BDC, we closed end credit funds base, etcetera. On the real estate side, as we talked about before, there is an opportunity to continue to expand the breadth of real estate product that we managed both on the equity and debt side given our origination and investment capabilities. But as we talk about adjacent strategies, another way to think about them is just step out strategies, not necessarily trying to reinvest the wheel or doing anything that is brand new to us. What we are trying to do is leverage co-competencies that we have resonant in the business and just expand the opportunity set.

Great. Thanks for taking all my questions.

And this concludes our question and answer session. I would like to turn the conference back over to Michael Arougheti for any closing remarks.

I don’t think we have any. We appreciate everybody's time and attention today and we look forward to speaking with everybody next quarter. Have a great day.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archive replay of this conference will be available through June 8th, 2016, by dialling 877-344-7529 and to international callers by dialling 1-412-317-0088. For all replays, please reference conference number 100-83210 and our archive replay will also be available on a webcast link located on the home page of the investor resources section of our website.