Welcome to Ares Management LP's Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded today Friday February 24, 2017. I’d now like to turn the call over to Carl Drake, Head of Ares Management Public Investor Relations.

Thank you, William. Good afternoon and thank you for joining us today for our fourth quarter 2016 conference call. I'm joined today by Michael Arougheti, our President; and Michael McFerran, our Chief Financial Officer. In addition, Bennett Rosenthal, Co-Head of our Private Equity Group; and Kipp deVeer, Head 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, note that performance of and investment in our funds is discrete from performance of and investment in Ares Management LP. 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, note that our management fees include ARCC Part 1 fees. Please refer to our fourth quarter and full year 2016 earnings presentation that we filed this morning for definitions and reconciliations of these measures to the most directly comparable GAAP measures. This presentation is available under the investor resources section of our website at www.aresmgmt.com, and can be used as a reference for today's call. Note that we plan to…

Great thanks, Carl. Good afternoon everyone. As Carl mentioned, the fourth quarter of 2016 concluded a very strong year for Ares as we generated our highest quarter levels of fee-related earnings and distributable earnings and our third quarter in a row of economic net income of over $100 million. As we look back on our important accomplishments in 2016, let me start by highlighting our strong investment performance, which partly drove our significant growth in fourth quarter and full-year earnings. Despite a year that started with collapsing commodity prices, recession fears and retreating markets, the equity and capital markets recovered quickly and then strengthened throughout the second half as investors’ regained confidence in economic growth and an extended business cycle. Against this backdrop, our investment returns were quite strong in our core strategies across all three of our investment groups. For example, during 2016, we experienced gross returns of more than 30% in our corporate private equity fund composite of ACOF funds one through four and approximately 20% gross returns in our largest U.S. and European real estate private equity funds. Within credit, we generated solid performance in a wide range of strategies including full year gross returns ranging from 9% to 13% across our credit strategies in U.S. and European direct lending and our liquid strategies and syndicated loans and high yield. In addition, our extremely managed BDC Ares Capital Corporation generated a total net return of approximately 10%. On the back of this strong performance, we continue to see strong demand from existing and new investors across the platform. We followed our record 2015 fund raising with another great year in 2016 raising gross commitments of approximately $14 billion supported by 127 direct institutional investors approximately 50 of which were new to our platform. Our differentiated and leading…

Thanks, Mike. Let me start by highlighting key things about our financial results then I will walk you through our results in detail and provide an outlook for 2017. In general, we are encouraged with how our business is performing, which is reflected in the growth in our key earnings and AUM metrics. And we believe we are well positioned for future growth. As Mike stated earlier, our fourth quarter and entire 2016 was a strong year of fund performance across the platform, which led to significant growth in our performance related earnings and also contributed to our ability to monetize assets and increase our distributable earnings across all three investment groups. We believe the strong performance and client satisfaction is setting us up for additional success in our fund raising including a new adjacent strategies. Also we continue to focus on expense control and efficiencies while still investing in our platform for growth. The combination of our management fee growth and expense discipline should result in margin improvement over the coming year and beyond. Finally, we want to emphasize the importance of our growth in incentive eligible AUM to be invested, which stands at more than $19 billion, which we believe will be an engine of future performance income growth. Now let's turn to our results. We are pleased to have generated significant fourth quarter and year-over-year growth and economic net income, or ENI, and distributable earnings reflecting stable fee related earnings and strong portfolio appreciation and realizations. For the fourth quarter and full year, we reported ENI of $113.8 million and $357 million respectively, which translated into $0.44 and $1.42 on an after-tax per unit basis after preferred distributions. This was the third consecutive quarter where we have generated ENI greater than a $100 million as fund performance…

Thanks, Mike. So in closing, 2016 was a great year for Ares. We feel very good about our business line performance and we believe that we're well positioned for growth going forward. We have significant dry powder, flexible fund mandates and long dated capital poised to take advantage of opportunities that the market presents as we navigate through changing markets. So before we take your questions just let me leave you with a few summary thoughts. Macroeconomic and industry tailwinds for alternative managers like Ares continue to be positive particularly with respect to the growing demand for yield and illiquid credit, which means fund raising prospects remain very strong. We had an excellent year of fund performance and our existing clients and new investors are validating that performance by committing new capital to us in both existing and new strategies and across multiple products on the platform. We continue to expand our platform by introducing new or adjacent products like our new junior capital direct lending fund where we can leverage our existing core competencies and track records. As Mike highlighted, we believe that the combination of deploying our shadow AUM, activating ACOF V and the expected earnings accretion from ARCC’s acquisition of ACAS will all catalyze earnings growth for this year and provide a higher base level for our DE in subsequent periods. And lastly, we sowed the seeds for future DE from the build up in our incentive eligible AUM, which provides significant upside potential in the coming years. I want to thank the entire Ares team for all of their hard work in what turned out to be an exceptional year for us despite changing markets and I want to thank everyone for their time today. And with that William I think we’ll open up the line for questions.

Thank you. [Operator Instructions] The first questioner today is Chris Harris with Wells Fargo. Please go ahead.

Thanks. Hey, guys.

Hey, Chris.

So you highlighted investment performance being pretty extraordinary this year. Wondering if you could delve into that a little bit deeper? Why is it that you – how are you guys able to achieve such strong returns, I guess is the question. I mean the 30% gross IRR in PE has got to be among the best around. So maybe talk a little bit about what drove that.

Sure, I will let Bennett give you his perspective from the private equity standpoint and then we can chime in on the credit side as well.

Well on the private equity side is just a continuation of our strategy of targeting opportunities with extraordinary growth. And if you were to just look at our portfolio, we've been able to do what we've been able to do in the past, which is to drive EBITDA growth while there was some multiple expansion in the valuation improvements for the most part it was driven by a strong EBITDA growth across the portfolio as well as the success which was mentioned in the energy sector where we did deploy capital at a very attractive time in the energy space and benefited from that. But overall I think the portfolio is performing really well. And if you look across, there is there's EBITDA growth across the portfolio.

And Chris I just make a general comment on credit. I think in the liquid credit strategies as we talked about the technicals in the loan and high yield markets were very strong. We got through the end of the year where we were seeing not just good fundamental credit performance, but spread tightening and pretty sharp increase in asset prices. So, I think, there's a combination in our liquid strategies, good fundamental credit selection coupled with just a very strong technical backdrop. And as you've heard us talk about before and Kipp talk a lot about on the ARCC call in the private debt and illiquid credit spaces, we do believe that we've created some meaningful competitive advantages in the market based on our scale and origination capabilities that allowed us just to continue to do what we always do, which is self-originating what we think are high quality assets at premium to what we're able to get in the liquid markets.

Great. And then one follow-up if I could regarding expenses. You guys have given some color in and around the management fees, but just wondering if you could talk to us a little bit about how you think expenses might trend in 2017? And then tied to that, what kind of incremental expenses should we be expecting from ACAS?

Sure. As we highlighted in the call, Q4 was a little elevated at $32 million of G&A, but I think a year ago we specified our objective was to keep on an average basis G&A at $30 million or better. And with the year coming in at under $100 million or $115 million we achieved that. So I still think that $30 million or so number is a good proxy looking forward. With respect to ACAS, the primary step up in expenses will be the addition of both permanent and some transitional professionals both on the investment team and operations side. Beginning with the first quarter, we think that would have an impact on the comp expense of about $4 million, but would actually run down during the course of the year as some of those transitional employees run off.

Thank you.

The next questioner today is Patrick Davitt with Autonomous. Please go ahead.

Thanks for taking my question. Do you still stand by the 30% margin guidance you gave last quarter with ACOF turning on?

We do.

Okay, great. And then more broadly, as the chances of reduced regulatory and capital constraints on the banks have gone up, could you try to frame the evolution of that group as a competitor? In other words, how competitive were they pre-crisis in your businesses and to what extent you benefited from the post crisis bank regulatory regime. And within that vein, any thoughts you have about potential headwinds as those constraints are removed, if they are?

So, I would just clarify. I think conversations that are happening are less about bank regulatory capital relief and more about bank regulatory relief. And the reason I highlight that is a lot of the conversation is about partial rollbacks of existing regulation coupled with the potential for actually higher equity capital requirement. So I think it’s important that when we speak about what the potential outcomes are here that we do separate the conversation about capital commitment or capital requirements versus the regulatory framework, particularly because Basel III is still in implementation and a large driver of that. I think it’s also important to start the conversation on this about the history of these asset classes that we’re now demonstrating leadership in. And if you really track the evolution of the private credit markets, the biggest driver of this opportunity was bank consolidation in the U.S. and the simultaneous scaling up of capital in the hands of non-bank providers over the course of the last 20 years. So if you go back and just look at, for example, the number of banks, the percentage of leveraged loans getting made within the banking system versus getting made without, leading up to the financial crisis, there was already a meaningful shift in where these loans were getting made. I think post the crisis, whatever marginal assets were still within the banking system did find their way out. So I think the question then is what could catalyze them to go back and a couple of comments on that. One, I think the banking model right now, particularly if you are having a conversation around increased equity capital requirements, is largely I believe going to be focused on reducing the cost of compliance and simplifying their businesses, and benefiting from rising rates…

Great answer, thank you.

Our next questioner today is Craig Siegenthaler with Credit Suisse. Please go ahead.

Hi, good afternoon everyone. This is Jordan Friedlander filling in for Craig. Where do you guys see your biggest product holes now? And could you just update us quickly on your appetite for M&A?

Sure. Product hold – we talked about this on prior calls. We don’t view that we have significant gaps in our product set. So where we’re seeing opportunity is more in adjacent or step-out strategies leveraging something that we already do well. I mentioned in our prepared remarks, this junior capital direct lending fund, that’s a new step-out strategy. It will have a meaningful amount of capital put behind it, but we’re able to do it leveraging our existing capabilities. So I think where we see gaps, it’s more where can we expand the margins of stuff that we already do well as opposed to wholesale new markets to go after. In terms of M&A, we’ve had a very good experience on the M&A side, I think as people know, both within ARCC acquiring Allied and ACAS to scale up that business. And also at Ares management in acquiring capabilities and people that we feel or additive to our business and bring a capability that we don’t have. So I think M&A will continue to be a part of the opportunity set, both at the management company and within the three business lines as we scale up the business. As we talked about before, it sound simple to say, but the filter for us is pretty straightforward. We need to acquire things that bring new capabilities that we don't have that we feel can make our business better. We need to have high conviction that we can actually make their business better by bringing them new distribution or new information and relationship capabilities that they don’t have. It has to be highly strategic. It has to be financially accretive and I think most of all it has to be a great social and cultural fit for us. And that may sound simple, but when you canvas the market for opportunities, it's very hard to check all four of those boxes. So we're constantly looking at opportunities, but the bar is very, very high for us.

Great, thanks. And then just one quick follow-up, can you give us some more color on your thoughts on the retail segment and update us on some of the initiatives you are taking to break into this channel.

Sure. So we think of attacking the retail market slightly differently than I think some of the ongoing conversations that folks are having around liquid alts and smart Beta ETFs and hedge fund replication ETFs. So when we think about retail, largely where we're focusing is building off of our core capabilities in the BDC closed end credit fund and mortgage REIT space. We view each of those structures as highly scalable and probably one of the most efficient ways for traditional retail investors to get access to alternative product and illiquid asset. So you're going to continue to see us growing our existing vehicles and likely building off of our track records there to hopefully look at new strategies within those structures. Two on the upper end of the market in terms of the high-net-worth and mass affluent channel, we have very good capital markets relationship with the Street and we are constantly distributing product through the private banks and the wire houses into the traditional retail market. And then lastly, we are in the early stages of developing what we think is a very compelling joint venture with a firm called [indiscernible] in the non-traded space. And I think as people know that market has gone through a fair bit of disruption given some of the competitive dynamics in this space and some of the regulatory issues in the sector around DOL, fiduciary and others. But we see that as a very significant opportunity to take our core alternative product into a segment of the retail space that we're not currently in.

Great, thanks for taking my questions.

Our next questioner is Michael Cyprys with Morgan Stanley. Please go ahead.

Good afternoon and thanks for taking the question. I am just curious if you could turn to direct lending for a moment, an area of growth for you and you’ve been talking too. Just curious if you could talk a little bit about the competition within the direct lending space maybe contrast U.S. versus Europe. And how the competition is evolving certainly others are getting into the space and sighting this as a growth area. How’s that impacting? How you guys are going about growing? And how it is impacting pricing and deal flow there?

I can take that. This is Kipp DeVeer. Thanks for the question. Just a couple of facts; we’ve been building a business in direct lending both in the U.S. here since 2004 and in Europe since 2008. And we do think that we have some pretty significant competitive advantages in that business and we talk about some pretty often with our investors, we’re happy to share them here with you all. The scale of our capital base is definitely an advantage for us. The size and the breadth of our team is a significant advantage for us, so to put that in perspective the direct lending business say between the U.S. and Europe is north of $30 billion assets under management. We have roughly 150 people, directly engaged in that business in 10 offices in the U.S. and Europe, which allows us to compete effectively. The U.S. business is invested north of $30 billion of capital on behalf of investors over the last 12 or 13 years and that tract record in that relationship network that we build along with obviously the platform and the reputation of our people is something that has continued to allow us to compete extraordinarily well despite to your point dramatic inflows into the asset class and increasing competition. So is it a harder than it was 10 years ago it is, do we still think it’s a fabulous business, we do. I think that in Europe, as you’re probably aware, things are just much, much less well-developed right we’re not as far along. So to grow our U.S. Direct Lending business we’ve done some to Mike’s prepared remarks step out strategies focusing on larger borrowers where we hear real opportunities on the junior side with a private fund that we’re raising and we’ve gone…

Great. Thanks, Kipp. Just a follow-up there on direct lending. Maybe correct me if I’m wrong, but I think historically, your business has been a little bit more sponsor driven in terms of the type of product in lending that’s gone on. Can you just update us on what that mix is today, how that’s kind of trended historically and how you see that evolving over the next five, 10 years, is there an opportunity to broaden out beyond sponsor finance?

Yes I think perceiving us as having led with the sponsor business both in the U.S. and Europe I think is accurate. Europe is probably a bit more heavily weighted towards sponsor finance in the U.S. these days. Believe it or not, the none-sponsored business is something that we’ve always been engaged in here, that we do, do deals directly with companies and those tend to be owned in the U.S. either by families or by entrepreneurs. So that has been a focus and will remain a focus of ours. But I think we don’t market it as consistently perhaps as others who say we pursue a non-sponsored strategy. To be clear in the U.S. we have a whole host of different verticals that we’re engaged in. So we have portfolio companies that are as small as $10 million of EBITDA and portfolio of companies that have $200 million of EBITDA. Again size wise very broad sponsored, non-sponsored we have a dedicated power and project finance team, we have a dedicated oil and gas team, we have a dedicated life sciences, venture technology team. So there are ways to continue growing both through industry specialization and also just broadening out the business. Europe I think actually is a fabulous opportunity for non-sponsored and what we found is as your capital base grows and as your reputation and track record kind of is continuing to be well-received in the market, non-sponsored business tends to find you as much as you can find it through your relationship network and your origination. As you’re probably aware there are loads and loads of UK and European based companies that are mid-market businesses that aren’t sponsor owned and I think we’ve continued to put resources against that effort going forward.

Great thanks Kipp, really appreciate it.

Sure.

The next questioner today is Mike Carrier with Bank of America Merrill Lynch. Please go ahead.

Hi thanks guys. I guess on the DE or the distribution outlook, we have pretty good visibility given what you guys mentioned in terms of the outlook for FRE. I guess just on the incentive side and the realized portion. Mike, you mentioned the one investment, the Clayton Williams. When I look at the overall portfolio on what can generate like performance fees, just wanted to get a sense on how that looks maybe relative to 2016, how seasoned it is. I know everything is predicated on the market backdrop and timing so it’s tough to gauge, but just wanted to get some sense, just because there was some decent activity in 2016 and obviously with that investment, there’s some in 2017. Just wanted to get any color around that.

Sure. Look, I think we’re surely in an environment where asset prices where they are is an attractive realization environment. So you gave all the caveats I would otherwise give in your question. So I’m not going to repeat them. But look we have a fair amount – we have a $169 million of accrued performance fees, just under half of those are in funds past the reinvestment period. So those are fees that will be monetized more quickly than funds early on in deployment. I also want to highlight and I think Mike mentioned or where we mentioned this in our prepared remarks that if you think about our undeployed AUM, 50 – or undeployed AUM that’s incentive eligible, it was $19.2 billion in funds that were already incentive generating. So I think there’s a lot of dry powder there and funds are already over there hurdles, as well as stuff that’s built up on the balance sheet. As far as timing between Q2, Q3 and Q4, it is hard to give you a good prediction on. I think we’ve said in the past if you look at the 169 million we have, if I was to give you the back of the envelope over a couple years it’s not unreasonable.

Got it, okay. And then just a follow-up I guess there’s a lot of potential change, out there whether it’s on regulation or on our taxes. Just wanted to get your guys’ updated thoughts. We don’t have anything that’s concrete but just how you guys are thinking about different scenarios with tax reform and potential conversion for you guys? And then on regulatory reform anything or any update on leverage and BDCs and if that did increase. What that could potentially mean in terms of an opportunity for you?

I’ll take the first part related to tax reform and what our considerations to our corporate structure. As a publicly traded partnership, clearly we pay a lot of attention to it. And discussion around corporate tax rates going down to 20% to 25% make the prospect of reassessing our corporate structure, increasingly intriguing. There’s a lot of moving pieces that are being talked about and until we see something probably more advanced it’s hard for us to have a clear view on. However, I would highlight that if you think about we articulate our business most of our revenue is already being taxed through corporate blockers. So a decrease – a meaningful decline in corporate tax rates would be completely beneficial to our unit holders. And again probably be a good inflection point to reassess corporate structure and potentially make flip to a C-Corp.

With regard to BDC legislation I do believe that that is a fantastic opportunity for ARCC and Ares Management. It has been building momentum for many years, I think with the new administration and then the bipartisan support that we’re seeing in both houses of Congress. Our view is that the likelihood and probability of seeing some BDC legislative support is increasingly higher than it was a year ago. Just one data point on that is if you look at the Financial CHOICE Act that was put forward by Chairman Hensarling, the BDC legislation fits prominently within that proposed legislation. I think as folks know it got as far as passing the House Financial Services Subcommittee a year ago and was beginning to make its way through the legislative process. Obviously the election interrupted that, but we feel that it is now moving in the right direction. To Kipp’s point about the boundaries of our opportunity continuing to grow and expand, clearly if there was legislative relief to increase leverage at BDC that would allow us to be much more impactful at lower yield and lower risk segments of the market in a way that we heretofore haven’t been able to really go after. And getting at that part of the market would be pretty straightforward to us, given the built out infrastructure that we have around origination and portfolio management. So don’t know quite how to handicap it but I think the probability has gone up dramatically. We do sense good bipartisan support and obviously the SEC historically had been a little bit of a constraint to progress and I think even that constraint is if not lifted is at least moving in the right direction, as well.

Okay, thanks a lot.

The next questioner today is Patrick Davitt with Autonomous. Please go ahead.

Thanks for the follow-up. Just have a quick one on the potential tax benefit. Am I right in assuming there's no potential negative impact there, right? It's all icing.

Yes there’s no potential negative impact. We highlighted in our prepared remarks that we don’t know the outcome because of the potentially material nature of this we have submitted request to the IRS to affirm the treatment of this so we hope to hear back preferably before our next earnings call for Q1 results, but we can’t be certain of that. But I think as we laid out in our prepared remarks practically we think there’s two alternatives, one is been able to treat it as an immediate deduction. And the second would be to amortize over a period of time. It was treated as an immediate deduction, what that would mean is we effectively would have deduction that would exceed what we think would be. Well if I just switch to 2016, our taxed income in 2016 that deduction would be larger then. So looking forward, it wouldn’t be unrealistic to think that 2017 would have no corporate taxes paid on management fees. And we’d probably also have a recapture of 2015 and 2016 taxes paid through some amended returns. I’ll probably give you the range of magnitude of that, we think it would be upwards of $0.40 to $0.45 impact on distributable earnings per common units. So again a onetime deduction would be pretty significant. If it was over to say 15 years, that impact, we guess would be probably closer to $0.03 per year on a distributable earnings per common unit common unit after taxes.

Very helpful, thanks.

Our next questioner today is Robert Lee with KBW. Please go ahead.

Great thank you. And you answered most of my questions but just real quickly and I apologize if you went through this since I came on late, but do you at all quantify the Clayton Williams impact on accrued and maybe it – where you with your thoughts are for its DE impact Q2 and beyond?

So with respect to Clayton Williams the impact on the accrued, it would be as far as this [indiscernible] DE. What our funds we receive is a mix of cash and equity from Noble Energy. That exact mix we’re not sure of today. Assuming, so you have kind of the variable what Noble Energy stock prices are in the future after the close of that transaction. And when we monetize that stock in the future where the prices are? If we look at the stock price of Noble Energy on the day of signing of that deal, the symbol was converted – that equity was converted to cash on that date. The carry combined with our GP interest in the fund would contribute effectively $40 million to distributable earnings. Whenever subsequently is monetized but we think that will happen over several quarters of post closing.

Great, thank you. That was my only question right now. Thanks.

Thanks Rob.

The last questioner today is Alex Blostein with Goldman Sachs. Please go ahead.

Hey guys, this is Grayson Barnard filling in for Alex here. And I think most of our questions were answered. Just the last one on you’re expecting the uptick in realization activity and I just want to get your thoughts on the impact of management fees and how you’re thinking about that impacting the run rate and FRE margins going forward? Thanks.

So I think if I understand your question, if realizations increase, what does it do to management fees? For our more mature funds that are past investment periods, it reduces management fees. However, obviously that’s why we raise successor funds. So using our private equity business as an example we no longer earn management fees on our second private equity fund. But any residual realizations coming from there would have no reduction of management fees. Realizations coming from our more recent vintages of a private equity funds would have a reduction as once a past investment period were paid on committed capital. But as long as we’re effectively raising successor funds, which we do, that are larger than predecessor, it should be net positive to FRE.

Got it, thanks.

Then obviously PRE benefits from the realizations, I suppose.

This would conclude the question-and-answer session. I would like to turn the conference back over to Michael Arougheti for any closing remarks.

Great. Well we said it once but we’ll say it again. We thank everybody for their continued support and appreciate everybody’s time today. And we look forward to speaking to you guys in a couple months. Have a great day.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today’s call, an archived replay of this conference call will be available through March 24, 2017 by dialing 877-344-7529, and to international callers by dialing 1-412-317-0088. For all replays, please reference conference number, which is 1009-9239. An archived replay will also be available on our webcast link located at the homepage of the Investor Relations website. Thanks for attending. And you may now disconnect your lines.