Welcome to Ares Management LP's Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Friday, August 4, 2017. I will now turn the call over to Carl Drake, Head of Ares Management Public Investor Relations.

Thank you, Denise. Good morning and thank you for joining today for our second quarter 2017 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 Kipp deVeer, Head of our Credit Group are also here with us and available for any session. 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 necessarily indicative or nor a guarantee of future results. Moreover, please 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 second quarter 2017 earnings presentation that we filed this morning for definitions and reconciliations of the measures to the most directly comparable GAAP measures. This presentation is also available under the Investor Resources section of our website at www.aresmgmt.com, and we will use this as a reference for today's call. Please note that we plan to file our Form 10-Q early next week. I'd like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any securities of Ares, or any other person, including any interest in any fund. Finally, this morning, we declared our second quarter distribution of $0.31 per common unit payable on September 1 to unitholders of record on August 18. We also announced our regular preferred distribution of $0.4375 per Series A Preferred Unit with a payment date of September 30 to preferred unitholders of record as of September 15. Now I'll turn the call to Mike.

Great thanks, Carl. Good morning, everyone and thanks for joining us. This morning we reported record second quarter earnings, reaching our highest level ever for quarterly management fees, fee-related earnings and economic net income. We also surpassed the $100 billion AUM milestone for the first time ending the quarter with $104 billion. Over the last 12 months, we've raised more than $15 billion in gross commitments, despite the fact that we didn't benefit from a major successor fund raise during the period. I really think this speaks to the breadth, balance and diversity of our business. I think as people know, the current environment is somewhat challenging from investment perspective given the significant liquidity in our markets. So as a result, we're generally being more measured on deployment across most of our strategies. Fortunately, we have patient long-term locked up and flexible capital, allowing us to navigate changing markets and find the best relative value over time. On the flip side, given all the market liquidity, we're repositioning our corporate liabilities, harvesting gains, launching new strategies and raising ever-larger new funds giving us significant dry powder to investors as the cycle evolves. Our strong results in key financial metrics reflect the growth of our management fees and in turn RFP-related earnings as well as our expanding asset base from which we grow PRE and distributable earnings. One can clearly see this from the growth in our fee-paying AUN our incentive eligible AUM, our accrued net performance fees and our investment portfolio. So now as I walk through our highlights, hopefully you'll see our strong fundraising momentum, our actual investment performance, our measured yet consistent deployment and our increased harvesting activity. As you can see on Page 4 of our earnings presentation, on the Fundraising Slide, we raised $5.5 billion in…

Thanks, Mike. Let me begin by touching on some important themes that you'll find in our financial results. As Mike stated, we had a record quarter that we believe appropriately illustrates the strength of our business. Our earnings reflects significant unrealized appreciation in our private equity funds, the higher pace of recurring earnings grew in a large part by full quarter of a top five earning management fees. Given our record levels of incentive eligible AUM and a 59% year-over-year growth in our crude net performance fees. We believe we are building significant future value, a strong potential for higher levels distributable earning. In addition, we expect gradual growth in our fee related earnings as we deploy our AUM not yet earnings fee, continue our strong fundraising and as we execute on profitability enhancement measures related to the acquired American Capital portfolio over time. With respect to margin, we continue to expect operating leverage to improve margin as we grow our management fees and realize a return on many of our growth investments and new strategies. In the second quarter, we generated economic net income of $158.1 million, our highest ENI to date, which translated into $0.69 on an after tax per unit basis after preferred distribution. The increase in ENI was supported by record fee related earnings of $53.4 million, up 35% from same period last year, which reflects the increase in management fees from ACOF V and some catch up fees from EIF V. We generated record performance fees of $104.7 million, up 67% from the prior-year period, primarily driven by market appreciation in our private equity and real estate funds. With that overview, I will take you through our results in greater detail starting with AUM. Over the last 12 months our AUM increased by approximately $8.8…

Great. Thanks, Michael. I think you sum that up pretty well. We have a number of obvious levers to pull to drive financial performance and growth. We’re really enthusiastic about our firm's prospects right now. We have three very well positioned businesses, each with meaningful competitive advantages and strong growth prospects and then most importantly all are delivering strong investment performance, which is we always say here in Ares supports growth in our assets over time. And thanks for everyone's time today. And with that operator, I think we’re going to open up line for Q&A.

Thank you. [Operator Instructions] And your first question will come from Craig Siegenthaler of Credit Suisse. Please go ahead.

Thanks. Good morning. It was great to see the additional SMA raise already in the third quarter. Can you update us on your overall strategy here and just a few other kind of side questions? Is this mainly a U.S. and European direct lending, our strategy and also, can the product be customized for your larger LPs. And how should we think about this in terms of - like sizing the long-term growth potential here.

Sure. Why don’t we cover to the high level and then we can give you some specific numbers about the progress that we’re making on the SMA front. As I mentioned in the prepared remarks, one very big trend in our space is that the larger institutional LPs globally are consolidating their manager relationships and you see it in the press we’re seeing it in the day-to-day behavior. They are reducing the number of managers that they have on their platforms and allocating larger commitments to folks like Ares who can manage multiple strategies for them either in a portfolio comingled funds or now as we’re talking about more recently managed accounts and customized solutions. I think the reason they're doing it is, it makes their business more efficient, they don't have to run hundred different fund managers, they need less people, they obviously with significant size can try to drive more favorable economics from the managers. I think recognizing that as the markets continue to get more volatile and more developed having the ability through managed accounts to move capital between strategies with less friction actually is going to drive better-better performance. So, I think this is a trend that will continue, obviously it’s not for everybody. You have to be of a certain scale in order to desire one of these and you have to be of a certain scale and sophistication in order to manage them. In terms of where we’re seeing the growth is largely in our credit businesses, is not limited simply to direct lending, although in today's environment that is an asset class that is of significant interest. But it’s typically across all of our credit strategies, direct lending in the U.S. and in Europe, structured credit and some of our liquid credit strategies…

Thanks, Michael. That was more one there. So, I’ll jump back in the queue.

Thanks.

And the next question will be from Chris Harris of Wells Fargo. Please go ahead.

Thanks. I appreciate your comments on the investing environment as being difficult. Wondering as you guys look to deploy ACOF V, is that a - is that fund constraint to just the U.S. or is it a go anywhere fund. And are you seeing better opportunities abroad right now than are available here in the U.S.?

This is David Kaplan, I’ll take that question, which is ACOF V is a global fund. There are certainly some sub limits in terms of geographies. But for the most part you should think of it is as a global fund principally focused on North America and Europe and historically are investing and deployment through funds one through four. The vast majority of capital has been deployed in North America, in the U.S. specifically. So, in terms of geographic focus that really is where we stand. We have significant resources in Europe as well, but largely think of it as a majority North America and a minority in Europe. Relative value between the markets in North America and Europe in private equity today, I’d say are largely equivalent. We’re not seeing better relative value in private equity in one or - one geography versus another.

Interesting, Okay. Quick unrelated follow-up, the OpEx this quarter of 1.38 is that a good run rate for you guys going forward?

Yeah, I think it maybe a tad on the higher side, there is some seasonality built in, but I think from a percentage standpoint, it’s probably in reasonable number.

The next question will be from Michael Carrier of Bank of America Merrill Lynch. Please go ahead.

Thanks guys. Maybe first question, just on the Par 1 fees. Just wanted to understand the dynamics there. I understand the $10 million waiver. I think it dipped a little bit more than that. So, maybe just in terms of the core business, the return to the yields. Just how is that trending and should we be thinking about it going forward?

Sure. Kipp, I will take this and if you have anything to add, jump in. But it is largely the fee waiver. I think just to remind people, the economic impact from the ACAS acquisition comes in the form of base management fee, which might highlight as running it roughly $10 million a quarter just based on the size of that asset base, as well as potential part 1 fees based on the pre-incentive net income at Ares Capital Corporation. As we talked about on the ARCC call earlier in the week and consistent with some of the comments I just made. We are being fairly measured in our deployment in that strategy despite the fact that we’re putting out large numbers on a relative basis, it’s reflecting a cautious stance. As a result, ARCC is running below its target leverage level. For those that follow the BDC, I think they have come to expect that we run the business roughly 0.75 to unleverage on the heels of ACAS acquisition that number has been closer to 0.6 times leverage. So, part of the impact is just running a lower leverage level, given our risk appetite and the positioning of the book and then the other two factors, which will begin to work themselves out over the course of 2017 are the repositioning of the ACAS book. For those of you who have looked at that, there is about $1.1 billion of low yielding or non-yielding assets within the BDC book that we acquired that need to get rotated and as they do, will contribute to the ROE and the Part 1 opportunity. And then the second is the wind down and ultimate resolution of the SSLP which was our significant joint venture relationship with GE. We spent a fair amount of time on the ARCC call talking about just having achieved a milestone earlier in the week. Those are very clearly defined fact that start moving that ROE up over the course of the back half of this year and into 2018.

Okay. That's helpful. And then maybe just on the real estate segment, it seem like a good quarter, kind of across on performance fewer earnings, fundraising, just when you think about the outlook of that segment and the relative contribution, what are some of the other opportunities that you guys are looking at and growing that part of the business?

Sure. So just to remind folks what we have now in our real estate business, we have a little over $10 billion of assets under management in the US and Europe and broadly speaking think about that as a direct lending business in commercial real estate, similar to our direct lending business to corporates as well as a very well-developed private equity capability in the U.S. and Europe ranging from traditional value add, investing through development core plus type investing. The thing that we do not do, which could be a long-term growth opportunity is in the core real estate markets and that's something that we continue to look at and we do believe that the opportunity to grow our real estate lending business is probably one of the most exciting opportunities that we have -- that we have in front of us today, given our capabilities and the market opportunity we see. I'm glad you brought up the FRE trend there because obviously we're a couple years removed from the acquisition of area. We're now on our second significant fundraising each of the strategies there. So, the business is obviously been fully integrated. Its performing well. We're scaling our successor fundraises, which is obviously contributing to the margin expansion there. So, I think what you should expect is we're going to continue to grow our core strategies. You've seen that already with our ninth value add fund with a target of $1 billion and the 415 close, which is an over 20% increase in terms of fund size from the prior fund. So, you'll see us grow existing strategies. The direct lending piece of our real estate business should show meaningful growth and then I think opportunistically either through acquisition or the addition of teams we'll go after some of the niche sectors that we're not currently active in.

Okay. Thanks a lot.

The next question will be from Ken Worthington of JPMorgan. Please go ahead.

Hi. Good morning. First with the publicly traded BDCs still trading generally at discount, do you think that that sector will continue to consolidate and if it does or you think it will, do it make sense for Ares to continue to participate there?

Kipp, do you want to talk about that?

Yeah, I am happy to. We've done two pretty substantial acquisitions I think as people know in the space and we've always said that our acquisition strategies are twofold. Number one, we want to do something that presents reasonable value. So, to your point about things trading below book, I definitely think there is some value oriented opportunities. But secondly, we want to do things in a consensual fashion. So, our BDC is not in the business of going out and launching some sort of hostel acquisition attempt or something like that just because a company happens to be trading at a discount for a temporary period. So, I would say if there is a situation like an alloy capital or an American capital has in the past to present itself, we're thrilled to be part of that discussion, but I think consolidation in that sector is difficult for a whole host of reasons.

Okay. Fair enough. And then just on the taxes, can you maybe reframe it either how much in taxes can you save over time or how much earnings is actually shielded over time and is there any earnings that for whatever reason not qualify for the shield or is everything eligible?

Sure. So effectually the way to think about the shied is a shield against corporate taxes in the U.S. which consist primarily of management fees and to a lesser extent some incentive fees primarily related to some liquid credit funds. As we mentioned in our remarks, we estimate $0.46 of DE benefit from the deduction and through the second quarter, we've utilized $0.07. So, when you think about the math going forward we talked about some of our trajectory of FRE growth. We think this will be fully utilized during the course of '17 and '18. What I do want to highlight though is it's a shield from a cash standpoint. This doesn't impact fee-related earnings or economic net income. What this does do is remove the drag of corporate taxes and management fees from distributed earnings.

Okay. Great. Thank you very much.

[Operator instructions] The next question will come from Doug Mewhirter of SunTrust. Please go ahead.

Hi. Good morning. First question on the real estate business. really nice earnings from incentive fees and related net investment income, usually large this quarter which implies you had some pretty good pricing, good exit opportunities. Would you expect that to be continued as are you a net seller and also does that make it more difficult to redeploy the capital if prices are that strong and I realize it's a very diversified strategy, you could have gotten utilizations from a wide variety of areas.

Yeah, so it's hard to generalize in the real estate business because as I mentioned we're doing development stage investing. We're doing transitional investing, we're doing core plus type investing in multiple geographies in the U.S. and in Europe. The good news is the performance across each of the strategies has been very, very strong and very consistent, that's showing up in the performance fee numbers. It's also showing up in the fundraising momentum that we have. If you talk to our real estate folks, what they will tell you is that while there is elevated liquidity in that market as well, given the size of the addressable market and given the feet on the street that we have, they're still seeing very, very exciting opportunities to deploy capital. So, I would actually say all of the strategies, that's probably where people are seeing the least amount of pressure right now. The fundamentals in the U.S. and European real estate business are very, very strong. You're seeing employment in rent growth in most of the markets we're investing in. Moderate supply increases, so there is not a big supply demand imbalance like we've seen lifecycle, in prior cycles and just a really good healthy amount of transaction activity, which puts us in a position to have a good balance between harvesting and deploying. If you look at the detail of where we're harvesting that will help part of the story. The other place to look is to look at our accrued net performance fee balances in each of our funds. As I mentioned in our prepared remarks, we're in the market now with our ninth value-add real estate fund in the U.S. We're likely to bring our fifth European fund here towards the back half of this year or early next year and so by definition just the ordinary course of rhythm of these businesses as we harvest prior vintage funds, as we start to raise and deploy new. So, if you look at the net performance fee balance you'll see a very healthy build in our European real state fund 4 in our real estate opportunity fund 6 in our core plus proper enhancement strategies in Europe and in our eight value add real estate fund. So, there's a significant amount of building performance fee behind it just given the success of that they are having in their markets.

Okay. Thank you, that’s very helpful. Switching gears, a little bit, your overall fee related earnings margin had a sequential uptick and I expect that you will continue to get a scale benefits is hitting that that 30% full-year fee-related margin not a possibility. Considering whatever the seasonality and your growth?

It think there are two points to highlight on this. The first is, as we said I believe in our last earnings call that we expected during the course of 2017, we would get that 30% on ago forward basis from that point. So, we that view has not changed so I do know Q3 or Q4 but we stepped up from 26% to 28% on a quarter-over quarter sequential. I think Q3 again, we still believe it will be this year. The one thing we do want to highlight, if you look at the ARCC contribution, and if the timing of the rolling of the ACAS portfolio. The Part 1 fee were flat year-over-year. We have been over 30% this quarter. So, I think the absent even deploying incremental AUM which we are and we about the sizable amount of manage fee we have tied to shadow AUM. We’ve talked a lot about the capital we’re raising. We’ve talked about how - we believe we have fairly scalable expense mode. But in addition to all that, we think just the continued rotation and working through that process was ACAS is going to get us to 30%.

Yeah. This is going to be total simple back of the envelop now. But if you just take away the fee waiver, you will see that, we have an FRE margin in the low 30% range already. So obviously, there is a lot levers upon a lot of things that play. But if you grossly over simplified it and just reverse the fee waiver to get a sense of what the embedded margin opportunity in the business is. You’re going to see that, that’s already into low 30.

Thanks. That’s all my questions.

Thank you.

The next question is will be from Alex Blostein of Goldman Sachs.

Hi. Thanks, and good morning. This is [indiscernible] filling for Alex. Just on realizations. How should we think about the timing of the sales for some of the large public positions that you guys have?

This is David. These are public companies, so it’s difficult for us to really comment on. Generally speaking many of the private equity positions in public companies, let’s just say we feel really, really good about those businesses, their management, their positions in the market. But really difficult to give specificity on what our liquidity plans are long-term.

Thank you. That’s help, that’s all for me.

And the final question this morning will be a follow-up from Craig Siegenthaler of Credit Suisse. Please go ahead.

Thanks. Appreciate the follow-up here. First one, European direct lending, I think it is back in the market in the second half of the fourth fund. I think the last one was around $5 billion. So just in terms of size. Should we expect something in the $6 billion, ballpark and in terms of final close, any help there, it will be helpful?

We can’t comment on specific fund raises. So, I will make a general comment about that business which is similar to our U.S, direct lending business. We have very quickly established a significant leadership position in that market in terms of market share, number of people that we have on the ground. Our return performance, our deployment pace, we really do have a differentiate business there. In terms of the AUM we’re already well over $10 billion AUM in that strategy alone and that market continues to evolve and open up to us in a way that I don’t think is opening up for others. As you would see in other successor funds, where we have real competitive advantage, great performance and a great market opportunity, we come to expect larger successor fund raises. So, without going to specificity, I would expect that that fund will be largely than the prior fund.

Mike, let me just add one thing to it as you are following to see how in fact the last fund was commingled fund $2.5 billion of equity and it's modestly leveraged to create more assets. So just as you look and manage expectations around what you'll see down the line to you how your -- yet they have your back straight.

And those are euros not dollars.

And then just one follow-up on infrastructure, I know you have a strategy there that's pretty mature with EIF focused on energy, but are there any plans to do anything in the more traditional infrastructure space, roads, airports, tunnel, shipping because there has been a lot of talk there, decent amount of fund raises there especially with what Trump maybe doing with his spending plan?

Yeah, I think the opportunity set in the market seems to be getting a lot of headlines and discussion just given the potential stimulus from the current administration. That said we haven't really seen in those projects flowing. I do think that there is an opportunity for us to take what we already do really well in EIF and within our broader energy strategy, coupled with some of the project finance lending that we do in our direct lending business to extend the borders and boundaries that we currently do into other infrastructure-related assets. Whether or not we push fully into what folks would call core infrastructure I think is a TBD, but clearly an opportunity for us to grow off from what already is a very unique, competitive advantage and capability we have in the markets that we're in today.

Great. Thanks Michael. That's it.

And ladies and gentlemen, this will conclude the question-and-answer session. I'd like to hand the conference back over to Mike Arougheti for closing comments.

Well thanks everybody. We appreciate you spending time with us on a Friday in August. We appreciate all the time and great questions and we hope you have a wonderful end to the summer and we will look forward to our next call in a couple months. Thanks everybody.

Thank you. 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 September 01, 2017 by dialing 877-344-7529, and to international callers by dialing 1-412-317-0088. For all replays, please reference conference number 1011-0034. An archived replay will also be available on a webcast link located at the homepage of the Investor Relations section of our website. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.