Welcome to Ares Management Corporation's Second Quarter 2025 Earnings Conference Call. As a reminder, this conference call is being recorded on Friday, August 1, 2025. I will now turn the call over to Greg Mason, Co-Head of Public Markets Investor Relations for Ares Management.

Good morning, and thank you for joining us today for our second quarter 2025 earnings call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. We also have a number of executives with us today who will be available during Q&A. Before we begin, I want to remind you that comments made during this call contain certain forward-looking statements and are subject to risks and uncertainties including those identified in our risk factors in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results, and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in Ares or any Ares fund. During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our second quarter earnings presentation available on the Investor Resources section of our website for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. Note that we plan to file our Form 10-Q later this month. This morning, we announced that we declared a quarterly dividend of $1.12 per share on the company's Class A and nonvoting common stock, representing an increase of 20% over our dividend for the same quarter a year ago. The dividend will be paid on September 30, 2025, to holders of record as of September 16. Now I'll turn the call over to Mike, who will start with some comments on the current market environment and our second quarter financial results.

Thank you, Greg, and good morning. We appreciate you joining us. Before we begin today's earnings discussion, it's important that we take a moment to acknowledge the tragedy that occurred on Monday. Blocks from Ares' New York headquarters, our city experienced a senseless act of violence that has reverberated through our community. On behalf of every member of the Ares organization, we mourn the loss of our neighbors, offer our deepest condolences to their families, friends and colleagues, and we thank those who have dedicated their lives to protecting our community members. Together, we will continue to care for one another with compassion and resilience. I'll now turn the discussion over to a discussion of our financial results. Ares reported strong second quarter results, demonstrating the strength and resiliency of our business during periods of market volatility and the breadth and diversification of our growing global platform. Our quarterly AUM and fee-paying AUM grew significantly, driven by the continued success of our fundraising and investing efforts along with continued strong investment performance and market appreciation in the portfolio. We logged our second highest quarterly fundraising total on record, of more than $26 billion raised with more than 20 strategies and 40 funds in market across three of our channels. With over $46 billion in gross commitments raised year-to-date, we believe that we're on pace to meet or exceed last year's record fundraising of $92.7 billion. As a result of our strong fundraising, AUM increased to $572 billion, which represents quarter-over-quarter organic growth of 19% on an annualized basis. While our fundraising was very strong despite the market volatility during the second quarter, the deployment environment was modestly impacted, particularly at the beginning of the quarter. In the U.S., our largest market, we saw a temporary slowdown in transaction activity in April, which bled into May, followed by a strong rebound in June as the markets adjusted for the impact of new tariff policies. Although U.S. LBO activity moderated compared to the second quarter of last year, our $27 billion of second quarter deployment was slightly higher than the comparable year-ago period despite the market pause experienced in April. In part, due to our strong perpetual fundraising efforts, deployment and drawdown funds and market appreciation, our FPAUM increased to $350 billion, representing quarter-over-quarter organic growth of 17% on an annualized basis. We also delivered very strong year-over-year growth in management fees of 24%, total fee-related revenue growth of 29% and FRE growth of 26%. These strong levels of growth reflect the compelling trends that we're seeing across our seven private credit strategies, acceleration in our private wealth franchise, meaningful expansion in our secondaries business and higher growth in our Real Assets business, including the benefit of our GCP International transaction that closed in the first quarter. In addition, our net accrued performance income balance increased 8.5% in the quarter to $1.1 billion as we experienced strong investment results across our business. As expected, GCP modestly compressed our overall FRE margin in the second quarter, but we believe that this is temporary and we remain on track with our financial expectations for the business. We continue to expect significant further contributions in FRE from GCP in the next several years as we continue to scale our data center asset management business, our global industrial development business, and capitalize on the various synergy opportunities, as Jarrod will discuss later. Now let me turn to some of the operating highlights across our business units. We continue to see strong demand from institutional investors allocating into our commingled funds and bespoke managed accounts. During the quarter, approximately 55% of our fundraising was in institutional products, including 30% directly into commingled funds and 25% into SMAs or open-end institutional fund structures. Our third special opportunities fund is experiencing strong demand, raising an additional $2 billion of new commitments in the quarter, bringing total commitments to date to nearly $5 billion since launch last year. We believe that we are in an excellent position to continue scaling our fundraise into year-end. In U.S. direct lending, we raised over $10 billion including $6.2 billion across our credit wealth products and ARCC, $2.5 billion in debt commitments to SDL III and $1.6 billion from institutional SMAs. We're also seeing strong traction in our sports media and entertainment strategy. As many of you know, we were a pioneer in providing flexible private capital dedicated to this sector. And we just held the first close for our second sports media and entertainment funds totaling more than $1.4 billion in equity commitments, representing over 70% of the fund's equity target. Similarly, our open-ended sports media and entertainment wealth product began taking monthly subscriptions in June with strong early reception in the market. Our European direct lending strategy raised over $1.1 billion from new SMAs and $800 million in the wealth channel. The strategy has experienced robust growth since the beginning of the year, driven by fundraising in the wealth channel and strong net deployment in our institutional drawdown funds. Further, we priced our first European direct lending CLO at over GBP 300 million which we believe is the first reinvesting CLO in the European direct lending market. In liquid credit, we raised $2.8 billion, including over $1.4 billion in new CLOs. In real estate, we raised $2.4 billion of capital in the quarter, primarily from $880 million of debt and equity at our nontraded REITs and our U.S. open-ended industrial real estate fund, as well as over $1.3 billion of debt commitments to our real estate debt strategies. Our 11th U.S. value-add real estate fund and our fourth value-add European real estate fund continue to be in the market and are well positioned for continued fundraising in the second half of the year. We currently anticipate both funds will meet or exceed the size of the predecessor fund. In infrastructure, we raised over $1.3 billion, including $850 million for the final close of our first Japan data center development fund. In total, we raised $2.4 billion for our inaugural data center fund focused on data centers in Tokyo. As we highlighted previously, we have additional locations entitled, permitted and powered in London, Tokyo and Osaka, where we anticipate raising capital starting in the second half of this year and into next year. Our team continues to build a pipeline of future development opportunities across North America, South America, Europe and Japan, and we're excited by the magnitude of our in-flight pipeline, which we expect to be a significant driver of growth for our Real Assets Group. Our secondaries group remains one of our strongest growth vectors for the foreseeable future. We believe that we're a market leader in the industry with the ability to invest across multiple asset classes and we have an exceptional network of relationships and capabilities that is enabling our growth. Since our acquisition of Landmark in June of 2021, our secondaries segment FRE has nearly doubled. And over the past 12 months, our secondaries AUM has increased 29% to nearly $34 billion. During the quarter, we raised $2.5 billion, including another $1.2 billion in our inaugural credit secondaries fund. This brings equity commitments in the credit secondaries fund plus related vehicles in the strategy to over $3.5 billion. In private equity secondaries, we launched a new fund focused solely on GP-led transactions, a particular area of strength for our team which requires a differentiated skill set and leverages the broader sponsor relationships at Ares. The fund and related vehicles have closed $800 million to date and we anticipate continued strong demand for this first-time fund. We continue to grow and diversify the product set in private equity secondaries to meet the dynamic needs of our GP clients. Our third infrastructure secondaries fund and related vehicles raised nearly $250 million during the quarter. And as of last week, raised an additional $575 million, bringing current commitments to $2.8 billion. Our infrastructure strategy is benefiting from very strong performance, and we anticipate our third infrastructure secondaries fund will hit its hard cap of $3 billion which is more than triple the size of the previous fund vintage. Finally, in real estate secondaries, we are preparing for the launch of our tenth real estate secondaries fund in the fourth quarter. In corporate private equity, we anticipate that our VII Corporate Opportunities Fund will hold its final close in September. The fund currently has $2.8 billion in commitments and we anticipate the final close by September will bring the fund to more than $3 billion total. In the wealth channel, we continue to benefit from our top 5 leadership position with an estimated market share approaching 10%. Our momentum remains strong with our fundraising for the first half of the year totaling $7 billion in equity commitments, a 54% increase over the first half of 2024. AUM across our eight semi-liquid products crossed $50 billion, and now seven of our eight products are over $1 billion with our eighth product launched in June, seeing early traction and well on its way. We believe that we have one of the broadest product sets in the market with eight semi-liquid perpetual products spanning credit, private equity, real estate, infrastructure and sports, media and entertainment. Our intentional design across these asset classes plays a key role in driving broad product adoption within the channel. We've continued to expand our global wealth distribution network now partnering with over 80 firms globally, a 33% increase year-over-year. Importantly, we conducted business with over 1,300 new financial advisers in the quarter, which is up over 200% from a year ago and illustrates our progress penetrating new financial advisers within existing channels as more investors adopt alternative investments. While we're deepening relationships with our top 5 distribution partners, these firms collectively only represent about half of our wealth capital raised year-to-date demonstrating the significant breadth of our platform and the continued opportunity ahead. International demand remains robust with more than 1/3 of our year-to-date flows coming from Europe and Asia. We are particularly excited to be partnering with leading banks in Japan and expect to see meaningful flows as a result over the next few quarters. Following the brief market dislocation in April, capital raising in the second quarter remained resilient and culminated in strong monthly capital raised in June. In the second quarter, we raised $3.4 billion in new equity, resulting in a total capital raise of $6.3 billion, including leverage. As previously mentioned, we raised equity of over $1 billion in ASIF and over $350 million in the total nontraded REITs. We experienced accelerated inflows from our leading open-ended European direct lending fund, raising over $800 million in the quarter, bringing total AUM in the fund to over $4.3 billion, which we believe makes it the largest fund of its kind in the market. APMF raised over $370 million in the quarter and has now surpassed $3 billion in total AUM. Our open-end core infrastructure fund raised nearly $250 million in the quarter and with the July 1 inflows now sits at more than $1.1 billion in total AUM. Building off a record month in July and what is projected to be another record month in August, we expect the third quarter to be a record quarter of capital raised across our semi-liquid funds as investors continue to seek our solutions, global scale and track record. Our balance sheet light insurance strategy is another area of compelling growth for us. During the second quarter, Aspida, our affiliated insurance portfolio company generated over $1.9 billion in new premiums, driven by continued strong demand across both retail annuities and flow reinsurance business. Aspida has continued on a solid growth trajectory ending the quarter with total balance sheet assets of $23 billion, $15 billion of which is sub-advised by Ares. In June, Aspida executed two new reinsurance transactions, one with a highly rated Japanese insurer and another with a highly rated U.S. insurance writer, further expanding its reinsurance relationships. Aspida remains on track to meet its 2025 target for new premiums of approximately $7 billion while maintaining discipline on liability costs and positioning new business to achieve its target returns. The strong growth that we're seeing across our wealth and insurance businesses, combined with the GCP acquisition and growth in other open-end institutional funds has resulted in a $50 billion increase in our perpetual capital over the past 12 months. Our perpetual capital AUM now stands at $167 billion and represents nearly half of our total fee-paying AUM. We believe this capital, which does not contractually repay at the end of an investment period, but instead can be continually reinvested, provides a stickier base of AUM with consistent management fees and often includes regular payments of fees through Part 1 and FRPR. We anticipate perpetual capital from both the wealth and institutional channels will continue to represent a significant percentage of our AUM growth going forward and should provide even greater visibility in revenue growth and profitability across the business. We believe the underlying health and performance of our portfolios remains very strong, supported by solid economic fundamentals and our intentional positioning in non-cyclical growth-oriented sectors and markets. In our largest strategy, U.S. direct lending, we experienced year-over-year comparable EBITDA growth of 13% with an average loan-to-value of 43%. When combining this fundamental performance with low LTVs and minimal impacts from tariffs, our non-accrual rates remain well below historical industry averages and our own historical averages. Interestingly, new market data highlights equity contributions from private equity sponsors and new middle-market M&A transactions are at a 13-year high in 2025 which we believe meaningfully reduces the risk of loss in the direct lending market. In European private credit, we're seeing similar strong performance trends in our portfolios with low loans to value. Of note, favorable interest rates and higher domestic investment is driving a resurgence of investment activity across Europe. With our leading pan-European direct lending platform, we're well positioned to take advantage of these trends. Our alternative credit, opportunistic credit, and liquid credit portfolios are also enjoying strong performance and very low delinquencies. Our real estate portfolio continues to experience improving fundamentals as well. Leasing trends are strong, rent growth continues to increase, and cap rates remain generally steady across our focus areas of industrial, multifamily, and adjacent sectors. This is leading to steady to modestly improving valuations and growing investment opportunities for the group. In infrastructure, we believe that there continues to be a compelling global opportunity to partner with major hyperscalers on data center campus build-outs. Now with our acquisition of GCP, we can source and develop new projects from the ground up, provide equity and debt financing throughout the investment life cycle and potentially develop power sources alongside our data center projects. Looking forward, we're once again seeing a strengthening transaction market environment into the third quarter. With the potential for lower short-term rates in the U.S. and lower rates already reflected in Europe, coupled with record amounts of private equity dry powder, we're optimistic that transaction activity could accelerate further in the second half of the year. For example, our global pipeline of investment opportunities across all of our investment groups and strategies is at the highest level in over a year. With a record amount of dry powder of $151 billion including $105 billion of AUM not yet paying fees, we believe that we're very well positioned to take advantage of higher levels of market activity. And finally, before I turn the call over to Jarrod, as I reflect on the first full quarter with our new colleagues from the GCP transaction, I'm very pleased with how well the integration is going. Strong platform collaboration is already occurring across the investment teams, the fundraising teams are fully integrated, and we are actively in the market with new funds and accelerating the development of new products. Our investment committees are appropriately aligned, and we're seeing a high level of interaction across the global real estate platform. As I mentioned earlier, the data center business is poised for growth with a large pipeline of projects at various stages of progress, which we believe can drive AUM growth and profitability in the business. With nearly $130 billion in AUM and over 880 investment and operating professionals, our Real Assets Group is one of the largest managers of real estate and infrastructure assets across the globe, and we believe is very well positioned for greater scale and long-term growth. And with that, I will turn the call over to Jarrod to provide additional details on our financial results.

Thanks, Mike. Good morning, everyone. As Mike stated, our business accelerated into the second quarter, driven by strong fundraising, higher year-over-year net deployment and a record quarter of market appreciation. We believe our forward-looking metrics, including our strong investment pipeline, and record available capital have us well positioned for continued strong growth. The second quarter reflected our first full quarter of financials, including our GCP acquisition, which contributed $103 million in revenues and $34 million in FRE for a 33% FRE margin. With the closing of our first data center fund totaling $2.4 billion, we expect to generate an additional $40 million in management leasing and development fees through the end of Q1 '26. This quarter included approximately $10 million of integration costs, of which we expect about $6 million to $7 million per quarter will eventually be nonrecurring and will run off gradually over the next 12 months. We view this positively since despite slightly higher initial integration costs, we're identifying more cost saves than we originally expected. When you add in the profitability from the new data center fund and the improving cost structure from synergies, we remain on track with the $200 million in FRE that we outlined for the first 12 months from GCP. When combined with additional fundraising from other data center funds and industrial development funds in Japan, along with the deployment of our existing dry powder, we remain excited about the future growth of the business. Now let me walk through a high-level summary of our quarterly results. Management fees were a record $900 million, representing a 24% year-over-year increase. As we discussed last quarter, GCP enhances our vertically integrated capabilities in real estate, enabling us to develop and operate high-quality assets with the opportunity for enhanced fund performance while generating additional leasing, development and property management fees, which are included in other fee revenues. As a result, other fees more than tripled year-over-year. While there may be some variability in other fees from quarter to quarter, as long as we have development funds that are investing in building new properties, we generally expect to see fairly consistent levels of other fees on an annual basis. Second quarter fee-related performance revenues totaled $17 million, which was almost entirely from APMF. Looking at normal seasonality, we typically see FRPR realizations in the third quarter related to our open-end core alternative credit fund and a majority of our credit group FRPR is realized in the fourth quarter. We currently have $20 billion of AUM in the credit group that is eligible to generate FRPR, which is up 10% from the second quarter of last year. As a result, we expect fourth quarter FRPR from the credit group to grow a similar percentage year-over-year, assuming continued price stability in the markets between now and year-end. Within real estate, we're not expecting FRPR in the fourth quarter. However, each of our nontraded REITs continues to show positive performance and could be in a position to generate FRPR next year. Fee-related earnings of $409 million for the quarter increased 26% year-over-year. FRE margins totaled 41.2% in the second quarter. And as expected, the integration of GCP temporarily compressed margins by 90 basis points. Excluding the impact of GCP, we expect FRE margins would have expanded in 2025. However, with initial lower margins at GCP, we still expect full year FRE margins for 2025 to be consistent with the prior year. As Mike mentioned, our net accrued performance income on an unconsolidated basis increased 8.5% in the second quarter to $1.1 billion at quarter end, of which nearly $950 million is in European-style waterfall funds. Our net realized performance income for the quarter was $16 million. As we discussed on our first quarter call, our European waterfall tax distributions, which had been typically realized in the second quarter, were recognized in the first quarter of this year, and we expect our third quarter net realized performance income will be comparatively similar to our second quarter level. With respect to our European-style funds, we're anticipating over $500 million of net realized performance income to be recognized in total between 2025 and 2026. It is possible that the split between years will be roughly 50-50. However, following the market fluctuations, we experienced in the second quarter that may push out the timing of certain realizations. We could possibly see roughly 1/3 recognized for the full year 2025 with 2/3 in 2026. If this is the case, we would expect some higher realizations to occur in the first half of 2026. Regarding our American-style net performance income, several modest realization opportunities remain possible heading into the fourth quarter of this year and early 2026, but they're dependent on conditions remaining on their current trajectory. Overall, realized income totaled $398 million for the quarter, a 10% year-over-year increase. During the quarter, our effective tax rate on realized income was 9.5%, which is in line with our range of 8% to 12% for the remainder of the year. As you can see in the earnings presentation, we had strong performance across our strategies with nearly every composite generating solid quarterly returns. In credit, we had quarterly gross returns of 5.5% for junior direct lending, 5.1% for opportunistic credit, 4.4% for our APAC credit strategy, 3% for alternative credit, 3% for U.S. senior direct lending, and 2.2% for European direct lending. Over the last 12 months, all these strategies generated double-digit returns ranging from 10% to 23%. Credit quality underlying our U.S. and European direct lending portfolios remained strong and stable, as Mike discussed. In real estate, we continue to see improvements in rent growth and property values. Our Americas real estate equity composite increased 3.4% on a gross basis. Our diversified nontraded REIT has generated a net return of 4.5% for the first 6 months of the year and is now approaching its high-water performance mark. While our diversified nontraded REIT would need to generate an additional 5% return above the high watermark by year-end to generate any FRPR this year, recovering to a new high watermark this year positions this REIT well heading into 2026. Our corporate private equity composite rose 3.3% on a gross basis during the quarter, and our private equity secondary strategy generated net returns of 3.1% in APMF and a gross return of 3.1% in our PE secondaries composite. I'll now turn the call back over to Mike for his concluding remarks.

Great. Thanks, Jarrod. We're experiencing positive results from several growth initiatives that we've been developing over the past several years. Our secondaries business is undergoing a meaningful inflection in growth, driven by secular tailwinds, creative new structured solutions, and a robust platform that's generating attractive investment opportunities. Our wealth strategy has the people, products, partnerships and educational content to continue to grow AUM at high rates. We believe that we have solidified our position as one of the top alternative managers of private market assets for individual investors and are poised to benefit as the wealth channel continues to allocate more capital into the asset class. Our insurance platform is expanding both through Aspida and our third-party insurance partners. With over $79 billion in insurance AUM across the platform, we have a demonstrated track record of capabilities and performance to enhance returns for Aspida and our third-party insurance clients, and we anticipate further growth in this business in the coming years. We also continue to lay the foundation for future growth opportunities such as data centers and digital infrastructure, and the recent announcement of our global capital solutions team to enhance our capital markets business. Our alternative credit and opportunistic credit franchises remain well positioned as solutions providers in large global addressable markets. And our Real Assets business is positioned for much greater growth as the cycle plays out. Going forward, as always, we will continue to look for ways to invest in our business in an effort to enhance investor returns and drive strong earnings results. As always, I'm proud and grateful for the hard work and dedication of our employees around the globe, and I'm also deeply appreciative of our investors' continuing support for our company. Operator, I think we can now open the line for questions.

Our first question comes from Alex Blostein with Goldman Sachs.

I would like to begin by discussing private credit and institutional demands, specifically how the compression in U.S. direct lending spreads is affecting those demands and fee rates. While I understand this is likely relative to liquid markets, I am interested in how products are perceived in more absolute terms and if there are any fee implications. For the second part, I have similar questions regarding your alternative credit business, which seems to represent a significantly larger addressable market. I am curious about your thoughts on the future dynamics in that area.

Thanks for the question, Alex. It's interesting. There's a lot of conversation in the market and the media just about the rapid growth in private credit. And I think we've been trying to point out to folks that if you look at the market broadly, private credit fundraising institutionally is actually down sequentially for the last three years. And when you look at the growth, it has not actually outpaced the growth of other alternative asset classes. It's actually just kept pace with the growth of private equity. That being said, and we've talked about this before, the private credit market is consolidated and probably consolidating further. And so our experience both institutionally and in the wealth channel has been continued growth. You saw that this quarter that we were able to continue to see institutional appetite for the private credit asset class in the form of SMAs and some smaller funds even in a year when we didn't have our large flagships in the market. I think that's a commentary on our track record, the length of the track record, the consistency of the return, the value of our incumbency in the portfolios. And as Jarrod talked about, on a relative basis, private credit is still delivering an incredible risk-adjusted return to folks. I think with the maturation of any asset class, there's always a risk that you see fee pressure. Candidly, we have not really seen it. And when people ask for it, we push back pretty hard. The ability for us to originate the types of assets we do, with the scale that we do we think is quite unique. Candidly, we have seen some of our peers who are trying to get into this market given the attractiveness have cut fees to try to attract capital. I just don't think that's a long-term viable way to build the business. And so we've been really resistant to that. I also think with the growth in wealth demand, obviously, it creates an appropriate tension in the market just around general compensation and fee structures. We're now getting to a point in our own deployment where I could see some of those large funds coming back as early as next year. And I think we'll once again show that the institutional demand at the current fee rates is still well in hand. Alternative credit or asset-based and asset-backed is obviously a big growth market. We are continuing to attack it with open-ended and closed-ended institutional product as well as partnering with third-party insurance companies and driving deployment into Aspida. And you asked about spreads. I'd say in both of those markets, the attractiveness obviously is the ability to generate excess return relative to the traded benchmark and while spreads have tightened in both markets, there is still a generous premium available to the liquid loan market and the ABS market. Currently, if you look at private credit on the direct lending side, you're probably 100 to 200 basis points wide and on our high-grade book, you're probably 60 to 90 basis points wide, so tight but still excess. So I think that will continue to attract capital as well.

Our next question comes from Bill Katz with TD Cowen.

I know we've asked this in the past, and I know you said it's going to take a bit of time to get there, but it does seem like the backdrop for the 401(k) market is starting to sort of align itself for potentially inclusion for alts. I was wondering how your conversations are going with some potential partners and how you sort of see the opportunity set for Ares, particularly since your nonqualified positioning continues to strengthen?

Yes, it's obviously a hot topic. And I've said consistently that we are big believers in the democratization of alternatives and increasing access to alternatives for the individual investor. That's not new. People have been able to access alternative exposures through our BDC for the last 21 years. We have been offering access to our alternative products through our growth in wealth. Insurance provides indirect exposure. So I think this is an evolution on an already pretty significant in-place trend. We do feel like we are closer than ever. Obviously, we are waiting to see an executive order that would continue to advance the process. To the extent that, that happens, we would then need to hopefully see rulemaking that allows plan sponsors to feel like they can take the risk of increasing fee in an effort to drive increasing net returns to their constituents. I don't know that, that is going to be a perfectly linear or quick process as plan sponsors work through the economics and fee agreements get renegotiated and you defend against certain litigation risks. So I think we're excited, we're enthusiastic about it. We already have a product that is ready to go. We have been having conversations with various retirement services partners. And so to the extent that market cracks open, I think we'll be ready to offer product into it. I always though, try to temper people's enthusiasm for this opportunity, the way that I do on the wealth side as well, which is just simply to say what we're doing here is diversifying our fundraising opportunity and our growth opportunity, but we're not necessarily creating a new cost of capital or a new asset structure that will allow us to do something different in the market. And so when we think about the growth in our business, we remain very focused on our ability to generate unique investment opportunities for our investors and then match them with the right capital. We do not focus on just the capital side. I think there's a disproportionate amount of attention these days in our market on AUM and AUM growth as opposed to quality deployment and quality growth. And so anytime you're opening a new market, it's exciting, but it also comes with risk if you don't maintain the right tension between your addressable market opportunity and capital. But I think we're closer than ever. When the market opens, I think, consistent with the way that we've behaved in the past, we will be there, and we'll take it from there.

Our next question comes from Patrick Davitt with Autonomous Research.

I appreciate the helpful comments on how deployment pipelines are tracking so far in the third quarter, but I've seen news about some significant refinancings from DL back into the broadly syndicated market in July. Could you also update us on your perspective regarding the gross-to-net tracking in the second half after a positive surprise in the second quarter?

Yes, I think it was well covered on the ARCC call, and we've kind of added some context for the other parts of the business. I'd say with regard to the specific BSL refi of direct lending, as we've talked about before, we're kind of on both sides of that. Obviously, to the extent that there's something in our portfolio that finds its way back into the broadly syndicated loan market. We will typically follow it back into that market in our liquid credit business, and sometimes even participate as an underwriter or a large anchor investor in that transition. Two, as we've talked about, I think one of the big differentiators in our direct lending business is our ability to originate and deploy across the entire middle market spectrum from lower middle market to upper middle market, and we are much less reliant than many others in the market on that upper middle market sponsor flow that tends to trade back and forth between broadly syndicated loan and direct lending market. So everything that we're seeing now has us continuing to have confidence that the pipelines are building into Q3, not just in direct lending, but in other parts of the business like secondaries, opportunistic credit, real estate, et cetera. So nothing that we're seeing that would change that view right now.

And we'll go next to Ken Worthington with JPMorgan.

There's been a number of headlines in recent months about the growing attractiveness of the European market for private assets, especially on the back of Trump tariffs. How does the health of the European direct lending market compare to the U.S. when thinking about this from both a deployment perspective and a credit quality perspective. As we look beyond direct lending to asset-backed finance, how does the opportunity to grow there in Europe look from a fundraising perspective and maybe deployment as well?

Yes. Look, I think that it's interesting because I think coming into the year, European positioning relative to the U.S. market was much different. We now have a different rate trajectory and different fiscal stance that is actually making Europe much more attractive. We're seeing increased investment and we're seeing increased investor appetite. You can see that in the deployment numbers when you look through the different businesses. You could also see the fundraising numbers as an example, we saw a meaningful increase in fund demand at ESIF relative to ASIF as I think certain investors have been shifting allocations from the U.S. market to the European market. While I think many continue to have long-term concerns about structural growth in Europe, I think for the foreseeable future, the increased spend and rate positioning should, in fact, increase transaction activity, and that is what our pipelines are telling us, both in direct lending, real estate, real estate credit and asset backed. In terms of credit quality, the performance within the private credit books are kind of right on top of each other. Loans to value in U.S. direct lending is about 43%, loan-to-value European direct lending about 49%, interest coverage in the U.S. book is 2x, interest coverage in the European book is about 2.3x. When you look at non-accruals, kind of on top of each other, Europe is probably a little bit better than the U.S. market. So there's nothing that we're seeing in the portfolios would indicate that credit quality is deteriorating in Europe at a different rate than the U.S.

We'll go next to Kyle Voigt with KBW.

So Mike, you spoke a bit about your retail distribution with a number of firms you're partnering with up over 30% year-on-year. And it sounds like the source of your inflows continues to broaden as well. Can you just talk a bit about the investment you've been making in distribution to drive that? And how much more do you think there is to go there in terms of adding more partnerships and further broadening distribution over the next couple of years? And you also mentioned 1/3 of your retail flows coming from international, which already seems really healthy, but you're still adding partners there as well. So do you think there's room for that proportion to even move higher as we look out over the next coming years?

The simple answer to all of your questions is yes. We continue to be incredibly excited about the progress we're making. The types of investments you need to make are, first of all, in product. We have innovated in areas like our infrastructure fund, sports media and entertainment, our European credit fund, and our private markets funds. It starts with a good product that has a strong track record. You also need to support the distribution effort with a significant investment in people worldwide. We have around 175 people in our global wealth business. One reason for the increase in international flows is that we've been adding personnel in Europe and the Asia Pacific regions to enhance those distribution efforts. Additionally, it is crucial to invest in ongoing education and content to support the adviser community as we continue to introduce products into that sector. In Q2, we raised about $3.4 billion of equity, which was over 30% higher than it was a year ago. July was a record month for us, with approximately $1.4 billion in equity raised, and August is expected to exceed that, close to $2 billion. We are seeing continued momentum as Q3 progresses. This is encouraging because there was some anxiety that this channel might struggle to remain durable during volatile markets. However, we’re experiencing the opposite. The investment thesis that people are seeking, along with the stability these products provide, is reflected in the distribution numbers. Throughout the recent tariff volatility, we did not see any significant rise in redemptions; in fact, redemptions in Q2 were less than 1% of total AUM. We're experiencing good gross flows and robust net flows. We are continuing to expand our partnerships, and the number of partnerships is increasing. Many of our products are currently underexposed on several large wealth platforms. We effectively have one product on every major platform, but we are not represented on every platform with every product, indicating substantial room for growth. Regarding Asia, we've made significant investments in that market. In particular, we anticipate a meaningful increase in flows from Japan in Q3 as we achieve important milestones in our partnerships there. Overall, everything in wealth is trending upward, and the momentum in Q3 is stronger than we've seen before.

And we'll go next to Benjamin Budish with Barclays.

Jarrod, you mentioned that FRE margins should be kind of flat year-over-year with the impact of GCP. I wonder if you could talk about what are the sort of swing factors, thinking in particular about net credit FPAUM growth if the environment shakes out a little bit better or maybe it stays a little bit more stagnant, how does that impact the near-term margin outlook? What's kind of embedded in that guidance?

Sure. Thanks, Ben. Nice to hear from you. Really, whenever we give that type of guidance and we talked about this at our Investor Day and I'll bring it up again here is we try to give what I'd call more all-weather guidance, so just in a normalized market. So you're exactly right on your puts and takes there. If we see a gangbusters back half of the year, deployment-wise, that will certainly be a boon to the margins. Likewise, if we saw an environment where there was not as much deployment, it's a little bit harder maybe to see what that environment might look like because we've shown that we've been able to deploy in both dislocated markets and robust transaction markets, but certainly, deployment is a key factor on it. And then now as Mike has been talking about on the call and in the prepared remarks, fundraising as it comes in from our nontraded products has an impact to our margins as well. For those products that have a distribution fee, you're probably net neutral for the back half of the year. And for those that come in, like the international flows that were mentioned in the last question, those are a benefit to our margin because they come without that distribution fee. So there's a bit of mix of all things. In terms of what we think we'll do here in the back half, I believe that the strength that we're leading from in terms of our ability to deploy here in the back half of the year, our fundraising strength, and GCP's gradual synergies coming into play, as I talked in my prepared remarks, all will help us absorb that drag from GCP for this year and really set us in a good position for next year.

And we'll take our next question from Michael Cyprys with Morgan Stanley.

I just wanted to ask about alternative credit or ABF. Just curious if you could maybe provide a bit of an update on some of the progress expanding your sourcing funnel, including partnerships and flow arrangements. How that's contributing today, how you see that evolving over the next 12 to 18 months? And then just more broadly on ABF, I believe historically, you guys have played more in the sub-investment-grade space. So just curious just around opportunity, scope, appetite around extending more meaningfully into the fixed-income replacement, investment-grade part of the marketplace. Curious in what scenario might you have more appetite interest for that becoming a bigger part of the business?

Sure. It's already a significant part of our business. I'll address the latter part of your question first. We have been involved in the ABF business for nearly 20 years, and I believe we are just beginning to build our capabilities and capacity. We have one of the largest global teams, made up of over 80 specialized professionals across 40 different asset types. We have successfully operated in various markets worldwide, covering both rated and non-rated segments. As the numbers indicate, this area continues to grow rapidly for us. When we differentiate between rated and non-rated or sub-equity versus high-grade, much of that differentiation is driven by the profitability and unique skills required to succeed in this field. Focusing more on the high-grade segment, whether for our own insurance affiliate or third-party clients, typically results in a lower fee rate and usually without incentive fees. In contrast, scaling the non-rated sector comes with higher return expectations and more common fee structures like 2 and 20. Therefore, the financial dynamics are quite different. To reiterate my earlier point, we are prioritizing growth in FRE and profitability over AUM growth, which requires a careful balance. Currently, about half of our business comprises non-rated assets, while the other half consists of rated high-grade tranches. I expect both segments to continue growing in balance. There is tangible value in the high-grade segment, as we and our peers have shown, fulfilling a real market need for corporations. If leveraged correctly, it can even enhance our origination capability in the non-rated area by providing comprehensive market solutions. Our focus is on expanding both sides, but given our lighter presence in the insurance market, our AUM perspective reflects that we are not as intensely concentrated there, although we remain significant participants.

And our next question comes from Brian Mckenna with Citizens.

So I have a question on direct lending, credit quality and performance. Your portfolios have performed incredibly well in really all parts of the cycle. And even for the industry, many portfolios continue to perform well despite the significant increase in base rates in the last few years. Mike, it would be great just to get your perspective on why performance and credit quality continues to be so resilient across the industry? And then bigger picture, we haven't really seen a true credit cycle in some time now. So why is that? Could it be a function of the staying power of private credit, the sector's ability to provide capital in all parts of the cycle and the underlying structures of these vehicles? Or are there some other drivers there?

It's a great question. There's a long-standing narrative in the market, which has persisted for 30 years, suggesting that private credit is risky while public credit is not, leading to expectations of continuous credit loss in private markets. However, we have not experienced that. Our public track record during the global financial crisis, COVID, and periods of rate volatility supports this point. The annualized loss rates in our direct lending portfolios hover around 10 basis points and have remained stable for an extended period. The notion that direct lending has not been tested through cycles is something I strongly disagree with. The past few years of increased base rate environments have actually benefited the asset class. Our senior direct lending has achieved a 14% return, European direct lending 11%, and opportunistic credit funds close to 16%. Unsurprisingly, this performance is drawing capital away from traditional fixed income, and I believe these returns are sustainable. The current performance uptick is due to the improving quality of companies entering private markets as awareness about them as a financing solution grows. Additionally, we're coming off a vintage where equity contributions to leveraged capital structures are at record levels, making loan-to-value ratios a strong buffer against potential losses. Even if we see earnings decline, the significant equity subordination in these markets should help to mitigate losses. I don't foresee an uptick in credit loss. Moreover, borrowers are increasingly recognizing the benefits of private markets; they pursue bilateral relationships with lenders, allowing them to react swiftly when executing their business plans and resolve issues collaboratively during challenging times. In public markets, the dynamic is different, where bondholders might try to take control of a company when they buy loans at a discount. There's a notable shift in the market where borrowers prefer to stay in the private space, contributing to positive performance since there are more options to address potential losses in a bilateral relationship. The duration of private credit capital, alongside the fact that most private credit funds are either unlevered or have low leverage, tends to reduce market volatility. Despite experiencing rate fluctuations, we haven't seen significant drawdowns in liquid markets, likely due to the strength of private markets. Government interventions have also played a role in stabilizing the markets, but private credit has been instrumental. While I wouldn't say I look forward to a typical credit cycle, should one occur, it may serve as a chance to further demonstrate the durability of this asset class. I believe we'll outperform again during challenging market conditions. Such a cycle could reveal a dispersion in returns, presenting opportunities for gains and continued outperformance, similar to what we've shown in previous volatility periods.

We'll go next to Brian Bedell with Deutsche Bank.

Most of my questions have been asked and answered. I have one more regarding deployment in terms of assets under management that have not yet started paying fees; that continues to grow nicely. Regarding the timeline, it typically takes about 1 to 2 years, roughly 18 months, to deploy. Given the potential for deployment to improve in the second half, does that speed up the timeline? Or do you believe this remains within the expected timeframe for the credit side of the business?

It's interesting to note that historically, there has been a nearly one-to-one relationship between dry powder and deployment. As our capital base increases, our deployment can also grow. This reflects the earlier point I made about the importance of balancing dry powder and the ability to invest. While we previously suggested a timeline of 18 to 24 months, the actual deployment has been around a year with respect to dry powder. For instance, we currently have $105 billion in assets under management that are not yet earning fees, and when you look at the recent deployment trends, they've been consistent with that amount over the past five years. Given our deployment pace in the first half of the year, we're on track to meet those expectations, and the assets under management will follow suit. It seems more accurate to consider a timeline closer to a year rather than the 18 to 24 months we've mentioned before.

Thank you. I'm showing no further questions at this time. This will conclude our question-and-answer session. And I will now turn the call over to Mr. Arougheti for final remarks.

Great. Thank you. We don't have any other than to wish everybody a great end to the summer and look forward to catching up again next quarter. 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 1, 2025, to domestic callers by dialing 1(800) 727-1367 and to international callers by dialing 1 (402) 220-2669. An archived replay will also be available on the webcast link located on the homepage of the Investor Resources section of our website. Goodbye.