Brennan Hawken: Got it. Thanks for walking me through that.
Operator: Our next question comes from the line of Ken Worthington with JPMorgan. Please proceed with your question.
Ken Worthington: Hi, good morning and thanks for taking the question. Maybe first on the fundraising guide. I think the — your comments that you’re on track for $65 billion this year suggests a recently reasonable slowdown in fourth quarter commitments. Is that just you being conservative, or did some funds that you expect in 4Q maybe get pushed to 1Q. Can you give us a little more flavor there?
Michael Arougheti: Yes, I think we said in excess of $65 billion, Ken, just because as you get into the end of the year, you have certain things that will either be pulled forward or roll. So I think we’re just trying to be cautious given that some things may slip, but the funds that we’ve articulated are all in the process of having their closes here in the fourth quarter, one or two may slip, one or two may not, and that’s really going to drive the ultimate change, but there’s nothing other than timing affecting what the ultimate outcome is going to be.
Ken Worthington: Okay. Great. I sort of figured that. In Alt Credit, I think there’s been a talk of a rush of deals to come before year-end. Is that what you’re expecting? And what’s driving this push into year-end?
Michael Arougheti: I think the pipeline there is building significantly. It’s probably one of the busiest parts of the firm right now. A lot of this is Basel end game driven and I think just folks trying to get focused on balance sheet composition and construction going into the end of the year. I don’t think there’s anything more than that, but we are absolutely experiencing that. The pipeline is building, transaction activity there has probably turned on more so than other parts of the firm right now.
Ken Worthington: Okay. Great. Thank you very much.
Operator: Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question.
Michael Cyprys: Great. Good morning. Thanks for taking the question. Maybe just on commercial real estate, I believe in the past, you’ve mentioned that you’d expect the bulk of the primary market opportunity out of the regional banks to come from CRE lending. So I guess how much activity have you seen so far on the CRE lending front? What steps might you need to take to enhance the platform, if at all, in terms of hiring or build-out in order to best capture the market opportunity set that you guys see?
Michael Arougheti: Thanks, Mike. Yes, I don’t think that we need to do a lot more than we’re currently doing. We have a very well-developed team, both in the US and in Europe. We’ve been building capability in Asia Pacific as well. As we highlighted on our prepared remarks, we have been forming capital and we’ll continue to do so. I think when you think about what’s going on in the world of commercial real estate and the change in basis, most of the exciting stuff is going to be happening in the top to middle part of the balance sheet of these entities, and that’s going to be a combination of real estate lending, solutions, real estate secondaries, structured equity through our opportunistic real estate business. And obviously, we have large teams against all three of those.
So I think the bigger issue is really going to be investor behavior because as much as everybody appreciates how big of an opportunity that is, you have a lot of investors that are also playing defense within their existing exposures. And until they kind of get their heads around what it is that they currently own, I think it’s going to be a little hard for them to get on offense. So I think for me, it’s really going to be all on the capital side, not the capability side.
Michael Cyprys: Okay. Thanks. And just a follow-up question. I wanted to circle back to your comments on deployment. I think you mentioned that you were encouraged by the activity so far here in the fourth quarter and the pipeline. I think you mentioned alternative credit busiest as part of the firm. Just wanted to double-click on that. If you could maybe just elaborate a little bit more, picked up in the third quarter here, but what’s the opportunity set for the deployment activity to broaden out beyond alternative credit, beyond credit and to some of the other areas of the firm? And how do you see deployment activity evolving as you look out over the next 12 months to 24 months. So maybe you could just remind us around some of the seasonality. Does that broadly pick up in 4Q and then slow down in the first quarter?
Michael Arougheti: Sure. I’ll try to hit this from a couple of different places. Number one, I think given the diversity of strategies that we have, similar to my comments on fundraising, I’ll make a similar commentary on deployment, which is when you look at the deployment experience, you’ll see obviously a slowdown but on a relative basis, still healthy deployment. So if you look at a year ago, in Q3 2022, we deployed about $18.3 billion, obviously led by credit. And in Q3 2023, we deployed $16.7 billion. That was up from 15.2% last quarter. So you kind of begin to see these ranges emerge. If you look at it on an LTM basis, LTM this year, about $66 billion, LTM last year, about $90 billion. So obviously, if we get into a market where we’re seeing heightened transaction activity, that also gives you another way to think about the range of outcomes and then just measure that against the $100 billion of dry powder that we referenced earlier and we’ll give you a general sense for where we are from a deployment opportunity standpoint as we deploy the dry powder.
Most of what is happening now and it goes back to what I just talked about with real estate, is going to be in and around the opportunistic side of the business, rescue lending, opportunistic refinancings, secondaries, structured equity, et cetera, because the new issue volumes both in corporate private equity and institutional real estate are slow. We continue to have a competitive advantage just given our incumbency and the size of our portfolio. So if you look at our US and European direct lending portfolios, you’ll see continuing 40% to 50% of deal volume at Ares is coming from the installed book of business. And so that’s a nice ballast as you think about the ability to deploy into a tougher new issue market. I am optimistic that, that transaction volume will pick up.
We’re seeing it build in the pipelines. If you talk to the sell side, they’ll tell you that there’s a significant pent-up demand for asset sales to be coming to market. We’re seeing it across the platform. But the math of it, if you just look at, for example, private equity and you say, today, buyout funds are sitting on about $2.8 trillion of un-exited assets relative to about $1.1 trillion of dry powder. And if you look at that installed base or the aging of it, 50% of the companies that are currently owned by buyout funds are — have been owned in excess of four years. And so if you just think about the weight of that money needing to transact and return capital to LPs, while most of what we’re doing is kind of on that opportunistic side, I still believe that you’re going to see new transaction volumes pick up, particularly now that you’re getting into a stabilized rate environment.
Michael Cyprys: Great. Thank you.
Operator: Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.
Patrick Davitt: Hi. Thanks for the question. A quick follow-up on that one. Is the cadence of the pipeline building more of a 2024 pop or should we expect to pick up more immediately in 4Q?
Michael Arougheti: I think Q4 is shaping up nicely. Again, it’s always — there’s always a seasonal pickup in Q4 as people rush to get deals done by year-end, typically just around tax planning and closing out the year. So there’s always a flurry of activity towards the end of the year. Sometimes that slips, sometimes it doesn’t. But I would expect that it will be a nice ramp through Q4 and then into Q1 based on everything I’m seeing.
Patrick Davitt: Great. And then a higher-level question. There was a rating agency out last week with a report showing large direct lending deals increasingly coming with no maintenance covenants. I think trying to argue that there’s more pressure to converge terms with the broadly syndicated market. I’m not sure how they even know that given these are private deals, but is that a trend you’re seeing? Is Ares participating? And if so, what is the argument, I guess, for lowering your protection…?
