Earnings Labs

Ares Management Corporation (ARES)

Q3 2016 Earnings Call· Mon, Nov 7, 2016

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Transcript

Operator

Operator

Welcome to Ares Management L.P.'s Third 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 Monday, November 07, 2016. I will now turn the call over to Carl Drake, Head of Ares Management Public Investor Relations.

Carl Drake

Management

Good afternoon and thank you for joining us today for our third quarter conference call. I'm joined today by Michael Arougheti, our President; and Michael McFerran, our Chief Financial Officer. In addition, David Kaplan, Co-Head of our Private Equity Group; and Greg Margolies, Co-Head of our Credit Group, will also be available for questions today. 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 such as economic net income, fee related earnings, performance-related earnings and distributable earnings. 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 third 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 third quarter earnings. We’ve reported significantly improved GAAP net income of $0.45 per unit and after tax economic net income per unit of $0.46 when compared to same period a year ago. Our after tax distributable earnings for common unit were $0.23 well above last year’s level of $0.14. Keep in mind that our third quarter after tax economic net per unit and after tax distributable earnings for common unit measures have both been reduced by the distribution from our newly issued Series A preferred units, which impacted both numbers by $0.03. We also declared a common distribution of $0.20 payable on December 5th to unitholders of record on November 21. Now I'll turn the call over to Michael.

Michael Arougheti

Management

Great, thanks Carl, good afternoon everyone. As Carl stated, we generated very strong third quarter results with all three investment groups delivering year-over-year growth in ENI and distributable earnings. Our earnings benefitted from strong investment performance across our group’s primary fund strategies particularly in our corporate private equity funds and certain credit strategies. We also took advantage of favorable market conditions to realize a few successful private equity investments and to monetize a credit fund with embedded gains which supported our distributable earnings. Our core fee related earnings also exhibited year-over-year and sequential quarterly growth on higher management fees and strong expense controls. As we will discuss a little later, we believe that all of the ingredients are in place for solid fee related earnings growth next year. Our broad range of alternative investment solutions across our three investment groups continues to resonate with our existing and new clients. First in today’s low growth, low rate environment, investors are increasingly seeking differentiated and less correlated investments in order to address the risk return requirements. In particular, we see a greater emphasis on current and predictable yields as well as a willingness to give up liquidity for incremental return. Many of our alternatives in illiquid credit strategies address these needs. This is further supported by the fact that banks continue to be under pressure from regulators to deleverage or simplify their balance sheets by shedding various non-investment grade corporate and other loans, particularly to smaller companies. Not surprisingly non-bank alternative investors in various forms are establishing in increasingly prominent position in this asset class. Our leadership in U.S. and European direct lending and the expansion of our platform across illiquid credit continues to position us for long-term growth and we have some very exciting strategic initiatives underway. Lastly, as we have…

Michael McFerran

Management

Thanks, Mike. Before I dive into earnings detail, let me provide some high level financial commentary. First, our third quarter fee related earnings margin improved to 27% from 24% where it had been for each of the three prior quarters. As we have stated before, we continue to expect that our FRE margins will exceed 30% on a run rate basis once we activate fees on ACOF V, which we currently estimate to be in early 2017 depending on market conditions. Beyond the step up, we continue to have a number of identified growth drivers, primarily the accretive benefits from ARCC's acquisition of ACAS, continued deployment on funds where we are paid on invested capital and management fees on new funds as we continue to raise capital including the next vintage of significant, successor funds across the platform. We also expect to remain focused and disciplined on expense controls. A few quarters ago, we laid out the goal of keeping our quarterly G&A expenses below $30 million reflecting our efforts to support margin growth through operating leverage. I’m pleased to report that these expenses for recent periods have been well below this level with $26.9 million for the third quarter. Therefore, assuming the success of these growth initiatives coupled with our focus on operating leverage through expense discipline, we believe we will be able to deliver additional margin improvement in the coming years. As Mike stated, we generated a meaningful year-over-year growth in ENI and distributable earnings reflecting the strong net portfolio appreciation and several successful exits. Our fee related earnings increased in higher management fees and expense controls. As we have stated in the past, our fee related earnings continue to be the main driver of our distributable earnings over time. But will be supported by exit activity that…

Michael Arougheti

Management

Great, thanks, Mike. Before we take your questions, let me leave you with just a few closing thoughts. The macroeconomic tailwinds for alternative managers like Ares continue to be positive particularly with respect to the demand for yield and illiquid credit. We talked about our investment performance continues to be strong across the platform and our existing clients as well as new investors are validating this performance by committing new capital to us in both existing and new strategies and across multiple products on the platform. We're expanding our platform by introducing new or adjacent products where we can leverage our existing expertise and track record as a way to satisfy this demand. We have a record level of dry powder and Shadow AUM, which is very long dated and which we expect will drive FRE growth and FRE margins over time. Mike talked about we believe the combination of our Shadow AUM deployment including ACOF V and the expected earnings accretion from the ACAS transaction will catalyze earnings growth for the next year and into subsequent periods. And lastly, we have a record level of incentive eligible AUM providing significant upside potential for growth in future performance fees in coming years. Its simplest form over the long-term, our goal at Ares is to be a consistent value added partner to our investing clients by offering a broad array of credit strategies with net returns of 5% to 15% and a variety of corporate infrastructure and real estate private equity strategies with the goal of generating 50% plus net returns. And as you can see from this third quarter, we continue to perform well across all of these strategies by leveraging our knowledge, expertise and relationships to source, evaluate and manage opportunities in these asset classes. We believe that this positions us well to capitalize on the overall favorable market conditions for alternative asset managers, particularly in potential periods of volatility. So, with that maybe just a quick thank you to our team for all of their continued hard work and thanks to our investors for their continued support and for everyone's time today. And with that operator I think we’ll open up the line for questions.

Operator

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Mike Carrier from Bank of America/Merrill Lynch. Please go ahead.

Mike Carrier

Analyst

Hi, thanks guys. Hey, Mike, maybe first one just on the distributable earnings and the outlook, I know you mentioned the outlook for FRE, which helps the distributable earnings and the distribution going into 2017. I just wanted to get a sense, when we look at, whether it's ACOF III and IV, the credit funds that can have realizations, just any color that you can provide on maybe seasoning the products and what we could like potentially expect in a favorable market backdrop in terms of exit activity versus maybe the past two quarters where you have seen some realizations there.

Michael Arougheti

Management

So I'll give just a little bit of a qualitative overlay and Mike McFerran can chime in with a quantitative view. I think it's important, Mike, that we refocus people on the unique attributes of Ares in the alternative asset management space. And as we've talked about consistently since our IPO, the percentage of distributable earnings that we achieved from FRE is significantly higher than the peer group. And that's a function obviously of the nature of the strategies that we manage as well as driven by the diversity of funds that we manage. So by definition, I think what we've tried to project and you see this in the results is that the level of DE should be more predictable and stable over time and a larger percentage of DE should come from FRE. As Mike McFerran talked about, I think the good news is going into Q4 of 2016 and into 2017 with the amount of Shadow AUM particularly coming from ACOF V and the catalyst of the ACAS Transaction just taking that very basic tenant of higher FRE to DE contribution. I think you can draw a pretty significant path to distributable earnings growth going into 2017. With regard to the timing of realizations obviously it's going to be situation specific and dependent on market conditions. And as we've talked about on past calls, I do think one of the things that make us unique as well is when you look at the fund strategies that we manage they all tend to be cycle durable and all weather. As an example, if you look at our private equity strategies where we're making platform investments in growth companies alongside potential distressed or balance sheet restructurings not only do you see a more level pace of deployment, but I think you see a more level set pace of realization. And so while there's no good predictor as to when we’ll be harvesting. I think if you look, you'll see more consistency in terms of the pace of deployment and realizations versus some of the peer group.

Michael McFerran

Management

Just add on to that, Mike. So if you think about our accrued net performance fees, they totaled $141 million as of September 30th. So, as Mike touched upon, we don't have a crystal ball when those will be realized. However as you see I think it's on a slide in our earnings presentation that about two thirds of that amount relates to private equity and if you further look at that and look at where our realizations have been coming from, it's going to be opportunity driven. But as Mike touched on, we've mentioned on the call the $0.06 step up in core contribution to DE just from the activation ACOF V. What we haven’t touched upon is in addition to ACOF V, the closing of ACAS as well as the undeployed dry powder, which all of those in aggregate we mentioned had about $189 million of growth management fees for any step downs associated with it. So looking forward, I think what's really favorable and what we're excited about is this continued growth of the core contribution to DE irrespective of performance related earnings.

Mike Carrier

Analyst

That's helpful. And then just a quick follow-up, the fund raising has been strong. It seems like there's – and you mentioned it, Mike, just in terms of the demand by the client base for yield and willing to give up some of the liquidity for the opportunities – it seems like there’s a lot of money going into that space. So, I the two questions are, in terms of you guys differentiating yourself and having like a long track record in these areas, how much is that helping you? And then I think you mentioned some of the stuff on clients in terms of the number of products that they're in. But maybe more importantly, when you think about non-U.S. institutional traction or high net worth traction, just where are you on the distribution side, given the demand for some of these products?

Michael Arougheti

Management

Sure, so two separate questions. Maybe we'll hit the second piece first. The demand that we're seeing, as I mentioned, is broadly coming from existing and new clients, but the trend that we're seeing, which we’re happy about is that our existing clients continue to make up the majority of new capital raise and those existing clients are finding it within themselves to invest across the platform in multiple strategies. And some of the numbers that we quoted in the prepared remarks, I think, are pretty dramatic when you look at a growth in clients in multiple products growing from 23% to 42% in a five year period, not even addressing the aggregate growth in institutional clients on the platform. So clearly, some of the investments that we've made in asset gathering business development and investor relations, over the last five years, are bearing fruit. As we also talked about in the prepared remarks, the global theme of yield, thirst for yield, non-correlated yield is obviously creating a pretty significant amount of demand in every corner of the market for alternative credit products. We're seeing that from retail investors given the demographic within the retail population and the shift from defined benefit to defined contribution plans. We're seeing it in the insurance space as folks are dealing with low fixed income returns and solvency two, going into solvency three. We're seeing it in the pension community as folks are trying to address actuarial payout requirements. So not surprisingly in this rate environment, the appetite that the investors retail and institutional have for yield is quite significant. I think the good news is that demand from investors’ lines up squarely with the products that we have. And to your point, it's lining up in products where we believe that we've created…

Mike Carrier

Analyst

Okay, thanks a lot.

Operator

Operator

Our next question will come from Patrick Davitt of Autonomous. Please go ahead.

Patrick Davitt

Analyst

Hi, thank you. To your last point, there's been obviously a lot of regulatory and press chatter about the potential for risk you’re lending and the shadow banking sector. And I imagine that a lot of the riskier stuff crosses your desk. First, to that last point, do you think that the chatter is fair, that private pools of capital may be doing more wreckless lending? And second, if so, have you seen the pace of those kinds of deals that you might feel are a bit stressed as increasing over the last year?

Michael Arougheti

Management

So, it’s hard to comment on what other people are doing. So we can comment on what we're doing. And I don't feel that our underwriting criteria or our investment behavior has changed one iota given some of the trends that that we're talking about. I also think it's important that when we talk about what's driving the growth in some of the credit spaces away from just the interest rate environment and investor behavior is they are leaving the banking system. And the fact that they're leaving the banking system doesn't by definition mean that they're riskier loans. It just means that because of regulatory capital or changes to the structure of bank business models, they're not being funded within bank balance sheets, but they're being funded within the wholesale funded market. So I for one at least in the seat that I sit and I'm not seeing what I would think of as reckless lending behavior. I think what we are seeing as I talked about is the potential for structural deterioration or return deterioration if the liquidity in the market continues and the supply of investment opportunity doesn't keep pace. At least what I'm seeing today, the supply of investment opportunity in the credit space is still keeping pace with the amount of capital that's getting raised. And for folks like us that have built real barriers and competitive advantages, I still think that it's a great, a great time to be investing. I don’t know Greg if you have a different view on…

Greg Margolies

Analyst

I would say consistent, our approach to credit and our hurdles that we have to cross to make an investment decision really haven't changed. And I don't think our credit quality in our portfolios has deteriorated at all.

Patrick Davitt

Analyst

Okay, thanks. And then quick follow-up on the – what would be distribution had been without that one big realized loss you talked about?

Michael McFerran

Management

We said we realized $20 million, so the tax impact of that off the top of my head but at least on a pretax basis, it totaled about $0.09.

Patrick Davitt

Analyst

Great, thank you.

Michael Arougheti

Management

Okay.

Operator

Operator

Our next question will come from Doug Mayweather of SunTrust. Please go ahead.

Matya Rothenberg

Analyst

Hi good afternoon. This is actually Matya Rothenberg filling in for Doug Mayweather. Thank you for taking my questions.

Michael Arougheti

Management

Sure.

Matya Rothenberg

Analyst

On the reclass of special situation from credit to private equity, is that just like administrative or does it represent a change of strategy?

Michael Arougheti

Management

So, David Kaplan, who runs our PE group will take that one.

David Kaplan

Analyst

I would…

Matya Rothenberg

Analyst

Okay, thank you.

David Kaplan

Analyst

Sure. I would not characterize it as administrative and I would not also characterize it as a change in strategy. I would say that the dynamic in the distressed market and just to remind folks the ACOF funds historically are approximately 50% of capital has been deployed in a distressed or controlled strategy, 50% in what I would referred to as regular way private equity, so very much in the distressed business. The market dynamics are such that credits are move, move quickly, trading is moving very quickly and the coordination of our more distressed trading strategy in the form of SSF, special situation funds, and our distress for control efforts in our private equity funds, ACOF, having those under one roof if you will on a day to day basis being more coordinated. We think is a win-win for each strategy, very simple.

Matya Rothenberg

Analyst

I understand. Thank you. And then on the CLO that you closed – whether you closed during the fourth quarter, have you seen investors' appetite improving in line with the general demand for yield or has demand for CLO specifically improved, as well?

Michael McFerran

Management

We've seen investor appetite increase for CLOs as we get closer to risk retention compliance. So, you're seeing an increasing amount of CLOs getting done in the fourth quarter as a pull forward from the first quarter of next year. But generally you've seen liability spreads come in, which has improved the arbitrage within the CLO, and that has given the global negative or low-yield environment that has really attracted a number of equity and mezzanine investors to the space.

Matya Rothenberg

Analyst

Okay, thank you. That's all I have for now.

Michael Arougheti

Management

Thanks.

Operator

Operator

Our next question will come from Ken Worthington of JPMorgan. Please go ahead.

Ken Worthington

Analyst

Hi. Good afternoon. Maybe, first, compensation – you've kept it stable or really modest growth for some time. As we think about your plans for continuing to grow the business in 2017 and 2018, how should we think about maybe headcount growth expectations, maybe your ability to leverage existing personnel as you launch more products? And ultimately like how do we kind of hone in on compensation growth over time?

Michael McFerran

Management

We said at the beginning of this year that our compensation had stepped up as we entered 2016, as we had been making investments to manage the new capital we are raising, and make investments to raise that capital. So, I expect, just by a function of increased profitability, comp will grow modestly in the future as you look ahead to 2017 or 2018, but similar to G&A, I think we're maintaining a lot of discipline about headcount and compensation growth. And to your point, if we look at it Q2 to Q3 at least just sequentially quarter-over-quarter the comp was effectively flat. So, I think we're doing a good job there and we expect to continue to do so going forward.

Ken Worthington

Analyst

Okay. Is that a function of your investment professionals and your sales professionals kind of doing more with less? Or can you help me just get a better understanding of – I understand you're disciplined, but how are you being disciplined? What does discipline really mean? I see the end result of it.

Michael Arougheti

Management

Yes, I mean, look the end result, I think, you're seeing is getting more operating leverage. But again, comp hasn’t been flat the last 12, 18 months. I mean we have seen an increase in comp in 2016 over 2015 that was not insignificant. And that was again I think we had front loaded a lot of investments across operations, business developments and our investment teams as we are out raising and starting to deploy that capital. And as you know for a lot of the money we manage, the revenue trails the expense load. So I think when we talk about, one, there’s the time factor of this where a lot of those investments have been made. And then the discipline is just the discipline, similar to G&A, of us just running a good business and making investments where we think there's an attractive ROI for us

Ken Worthington

Analyst

Okay, great, thank you. And then indicated, I think, gross returns of 2.7% in Q3 for a portion of direct lending. Can you give us the Q3 performance figures for tradable credit maybe broadly in Q3, if that's possible?

Michael Arougheti

Management

Sure. We’ll grab that right now.

Ken Worthington

Analyst

Okay. Maybe I'll just sneak one in while you're looking for it.

Michael Arougheti

Management

Go ahead.

Ken Worthington

Analyst

Sorry, go ahead.

Michael Arougheti

Management

No…

Ken Worthington

Analyst

You indicated $14.2 billion of incentive eligible AUM, of which I think 68% was within 1% of the hurdle rate. 3Q was a pretty good quarter for credit. And given our perception of strong returns in 3Q, maybe talk about why Ares didn't see more of the non-ARCC AUM within that 1% of the hurdle rate migrate to incentive generating AUM this quarter.

Michael McFerran

Management

Sure. So, you’ve got to look – if you look back over the last 12 months, we've raised over $24 million. We’re now in capital deployment mode with a lot of money we've raised. When you're in the early days of that, you're working to get through and the respective hurdle rates or preferred return levels for each of our funds, some of it is a function of, frankly, younger vintage of a lot of that capital.

Ken Worthington

Analyst

Okay. Okay, great, thank you.

Michael McFerran

Management

In fact, on the performance, I'd direct you to slide 28 in our earnings presentation that was on the website, you will see a breakout for within tradable credit, our high yield performance for the quarter on a gross basis, was 4.2%, the loan performance for the quarter was 2.6% growth.

Ken Worthington

Analyst

Okay, great. Thank you.

Operator

Operator

Our next question will come from Michael Cyprys of Morgan Stanley. Please go ahead.

Michael Cyprys

Analyst

Hi, good afternoon. Thanks for taking the question. I just want to dig in a little bit on investment income within the operations group management segment that you have. Can you just elaborate a little bit more on what drove the $20 million realized loss. I think you maybe mentioned something about a hedge fund. Just curious if you could elaborate on that, how much more losses could we see. But then also within that segment it looked like there was a $4 million positive unrealized mark. If you could elaborate on what's driving that and just maybe flush out what the $86 million investment balance is for that particular segment.

Greg Margolies

Analyst

Sure. So just to help folks understand that bucket and then we’ll address the investments specifically. Effectively when they are in the operations management group, effectively what we’re saying is they don’t fit squarely within one of the three core business units. So often times we’re using that portion of the balance sheet to incubate new product ideas, launch new business initiatives et cetera, et cetera. Within that bucket one of the investments we made was in a multi-manager, multi-strat hedge fund platform called DMOS. We launched that entity about two years ago with a spinout of a team and a systems platform from Guggenheim Global Trading. The investment thesis behind that business was A similar to what we were talking about in our core PE credit and real estate businesses, institutional investors are continuing to consolidate relationships with broader managers and we saw an increasing demand coming from some of our core clients for that particular strategy. And then number two, we had a prevailing view at the time that the multi-strat, multi-manager strategy itself was actually a pretty important value proposition to the institutional investor base giving them the ability to more efficiently access multiple strategies in one location, which had the impact of a reduced operational due diligence burden, it gave folks comfort with the risk and compliance infrastructure. And then, similar to what we’re seeing with folks who are dynamically allocating across our platform now, would give the institutional investor the ability to allocate in a more frictionless way across various equity long/short strategies. The fund got off the ground with some capital from a significant institutional investor client. It maxed out at about $350 million of capital. And then telling folks on this phone what they know, obviously the hedge fund space came under a significant amount of pressure. The business was actually generating quite healthy relative returns but on an absolute basis, just given what’s been going on in the equity markets, it was our view that this was not the environment to scale that platform. So, in essence, we wound down the existing fund, collapsed the systems, and have moved on. The $20 million was the full extent of the investment that we had made in that platform, so you should not expect to see any incremental economic impact to come from that.

Michael McFerran

Management

And then to follow on with what’s in the balance at September 30, as Mike mentioned, with the $20 million written off and no residual value held to it, a majority of what makes up that $86 million relates to the investments we made in certain Kayne Anderson funds, which, we would note, from the time of investment collectively are up just over 25%.

Mike Cyprys

Analyst

How should we think about modeling that line on a go-forward basis? Any suggestions there?

Michael Arougheti

Management

I think it’s hard. I would not expect a significant amount of increase there, for the following reason. As we’ve talked about before, when we think about the balance sheet, the core focus of the balance sheet is to support growth in existing businesses. And a large portion of the investments that we have is a diversified portfolio of $645 million right across 60 separate funds that we use to effectively support GP commitments within our three core business units. Where we see the opportunity to incubate new strategies again, we’ll use that other bucket, but the bulk of what we’re using the balance sheet for, as you’d expect, is for the continued growth from the core business. So, I would not expect a significant amount of growth there. And I would say, as a percentage of assets, if it’s growing it would probably grow in line with the existing proportions.

Mike Cyprys

Analyst

Great, super. And if I could just ask a follow-up on a separate topic, just on M&A. Curious how you’re thinking more broadly about M&A for Ares Management Company. Certainly you’ve been active in different parts of your business but as you look out over the next, say, three to five years, how are you thinking about that today?

Michael Arougheti

Management

Yes, we think about it a lot. I think, as you highlighted, we’ve been very successful acquiring fund managers of different sizes and different strategies. As I’ve commented on prior calls, two things are really driving this. One, there’s absolutely a consolidation trend broadly in the alternative asset management space. That’s being driven by some of the things we’ve talked about, like investor appetite for fewer relationships where they see a recognition that scaled platforms can provide better performance, broader product set and drive efficiencies in their own business. I don’t expect that to abate. So, I would think that the investor consolidation will drive disproportionate growth in the larger platforms. And then, second, as we’ve talked about on prior calls, too, there’s a little bit of what I’d call an aging out of some of the existing institutional asset management platforms. If you think about the evolution of the alternative asset management space, whether it’s private equity or credit, many of the platforms got their start in the late 1980s or early 1990s. Founders are getting on in years. They are faced with the question of what is the legacy of the business, what kind of investments do I need to make to continue to support growth. And then you have the new generation of partners who are thinking about the ever-changing world of alternative assets and how do they get to a platform that positions them for continued outperformance and growth in their own careers and opportunities. So, the consolidation trend, I think, is actually also being supported by the fact that there’s more platforms that are becoming available to support some of these things. So, as you would imagine, given the position that we sit in we see a lot of those opportunities. And when we see…

Mike Cyprys

Analyst

Great, thank you.

Operator

Operator

And our last question will come from Robert Lee from KBW. Please go ahead.

Robert Lee

Analyst

Great, thanks. Good morning or good afternoon, everyone. My question is maybe on the CLO business. I’m just curious. You’ve seen in the different press reports, different competitors looking to try to form third-party vehicles to provide kind of the equity for their CLO. Could you maybe talk about how you guys think about your retention? Is that something you’re exploring or interested in? Or do you like having – keeping it, to some degree, on your balance sheet?

Michael Arougheti

Management

I think Greg could take that one.

Greg Margolies

Analyst

Sure. The good news is there’s actually a variety of ways to satisfy risk retention in about the third-party vehicles as well as with financing vertical slices of the capital that’s required. And we are comfortable accessing all of the different types of capital that we would do in order to satisfy risk retention. Historically, we’ve also taken down all of the capital necessary to satisfy risk retention. Our view is we actively look toward finding the most efficient form of capital, the cheapest form of capital, and the best partners to do that with, to figure out which of those we will do. We are actively – we’ve raised a risk retention third-party capital vehicle in Europe. And we continue to explore a variety of different options in the States and we will likely tap any and all of those three different options that we’ve talked about to raise our capital going forward. I think what it really means is fewer and fewer of the CLO managers out there will be able to access the type of capital that’s required to meet risk retention requirements going forward and you’ll see the larger players like ourselves who do have access to a variety of forms of capital will continue to consolidate the space.

Robert Lee

Analyst

And I’m just curious, a bunch of years ago you saw consolidation in the CLO space post financial crisis. Are you saying the risk retention will start to lead to consolidation in the CLO space? Or is it more just existing managers running off what they have and new issuance is going to be concentrated more at firms like yourselves who can figure out how to provide that equity?

Greg Margolies

Analyst

That is both. We saw a real uptick in CLO consolidation, M&A activity in the back half of last year and the first half of this year. Things have slowed down a little bit since then but I’d expect it to tick up again as risk retention becomes – that bites in the fourth quarter of this year. That being said, you will see some guys who will continue to just run off their platform, with the larger guys being the preponderance of the new issue. But I do expect us to see a heightened amount of M&A activity in CLO managers going forward.

Robert Lee

Analyst

Great, thanks. Most of my other questions were asked so I appreciate you taking my question.

Greg Margolies

Analyst

Great. Thanks, Robert.

Operator

Operator

This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Arougheti for any closing remarks.

Michael Arougheti

Management

Great. We don’t have any, other than to thank everybody again for all of the time and interest and support. And we look forward to speaking to everybody next quarter. And don’t forget to vote. Have a good day.