Ares Management Corporation (NYSE:ARES) Q4 2022 Earnings Call Transcript

Ares Management Corporation (NYSE:ARES) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Hello, and welcome to Ares Management Corporation’s Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Thursday February 9, 2023. I will now turn the call over to Carl Drake, Head of Public Markets Investor Relations at Ares Management. Please go ahead.

Carl Drake: Good afternoon, and thank you for joining us today for our fourth quarter and year-end 2022 conference 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 forward-looking statements and are subject to risks and uncertainties, including those identified in 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 any Ares Fund.

During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from, or a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our fourth quarter and full year earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures. Note that, we will plan to file our Form 10-K later this month. This morning, we announced that we declared our first quarter common dividend of $0.77 per share of its Class A, and nonvoting common stock, representing an increase of 26% over our dividend for the same quarter a year ago. The dividend will be paid on March 31, 2023 to holders of record on March 17.

Jarrod will provide additional color on the drivers of the significant increase in our quarterly dividend later in the call. Now, I’ll turn the call over to Mike Arougheti, who will start with some quarterly and year-end financial and business highlights.

Michael Arougheti: Thanks, Carl, and good afternoon. I hope everybody is doing well. Despite significant volatility and uncertainty in the markets throughout the year, we generated exceptional growth and strong performance across our financial and operational metrics. Year-over-year, we grew 32% in management fees, 40% in fee-related earnings, and 30% in after-tax realized income per Class A common share, while also delivering a strong year of fund performance for our investors. This financial outperformance during challenging markets isn’t new to Ares, as our management fee-centric business model and flexible investing approach have enabled us to accelerate our growth during past turbulent market cycles and recessions. The strong relative performance of alternative investments last year, compared to the publicly traded equity and fixed income markets only further reinforces our belief in the benefits of private market investing.

Investors remain significantly under allocated to alternatives, which represent just over 10% in total global AUM. With a robust fundraising pipeline and our expanded investment capabilities heading into 2023, we believe that we’re well positioned for continued strong growth as we expect investors to increase their alternative allocations. While 2021 was a transformational year for our platform, with multiple strategic acquisitions, 2022 was a year of integration, and platform building to position the company for future growth. During the year, we added approximately 450 professionals with 150 in origination and investing, and 85 in fundraising and wealth management, including new senior wealth management heads in Europe and Asia Pacific. We also spent the year enhancing our retail platform through product expansion, growing our distribution capabilities and deepening relationships with strategic distribution partners.

Our affiliated insurance business, Aspida began directly originating annuity contracts in late June and finished the year with significant growth and momentum. We also continue to expand our relationships with existing and new institutional investors and experienced a significant increase in our institutional strategic partnerships. For the year, we added over 100 new institutional investors, while seeing over 90% of inflows coming from existing investors either through reups or commitments to new products. At the end of 2022, nearly 90% of our AUM was from investors that held multiple funds managed by Ares. We ended the year with $352 billion in AUM, an increase of 15% from $305.8 billion at the end of 2021 driven primarily by fundraising of $57 billion, including more than $12 billion in the fourth quarter.

Although, we didn’t have many large commingled funds in the market last year, our fundraising benefited from a growing base of capital from non-campaign fund sources, including our perpetual funds, certain managed accounts and other smaller funds. To that point of the $57 billion of fundraising in 2022, over $40 billion was capital raised from outside of our 20 largest institutional commingled fund families. We also continue to innovate and offer new strategies to our investor base. For example, more than 40% of our fundraising last year was from new strategies or products that didn’t exist five years ago at Ares. During the fourth quarter, we held notable fundraises, including a first close on our fourth US opportunistic real estate fund of more than $1.4 billion; and a final close on Infrastructure Debt Fund V, which reached approximately $5 billion of committed capital including related vehicles.

We believe that our Infrastructure Debt Fund V is the largest infrastructure sub debt fund ever raised and is a testament to our leadership in that segment of the market. Also our non-traded BDC Ares raised $847 million of equity commitments in a private placement in November through January and closed on a $625 million leverage facility. While we experienced a slowdown of net inflows into our two non-traded REITs flows remain positive with a combined $440 million of gross quarterly proceeds inclusive of our 1031 exchange program versus $157 million of quarterly redemption requests. We believe that our all-weather careful investment approach, lower use of leverage and sticky capital within our 1031 exchange program benefits our fee-paying AUM.

In addition, we’re still growing the distribution capabilities around the non-trade REITs. In December, we added a second large wirehouse for distribution and we expect to add two or more wirehouses or private bank relationships for our suite of retail products in the first half of this year. We anticipate additional inflows from these new relationships over time, as we continue to ramp our sales efforts. We are firm believers that the long-term growth opportunity for alternative products in the retail channel will be robust. Retail investors are meaningfully under allocated to alternatives compared to some institutional investors and key allocators across the retail space are looking to meaningfully expand their exposure to alternatives. Over time, we intend to offer drawdown and evergreen style strategies across our primary asset classes suited for both mass affluent and high net worth investors.

As you may recall, we didn’t expect 2022 to be a record fundraising year for us without many of our largest fund families in the market. For 2023, driven by the recent launch of several of our largest commingled fund families, we believe our aggregate fundraising will be well in excess of last year’s and will approach our record in 2021 of $77 billion. In the aggregate, we expect to have approximately 30 commingled and perpetual life funds in the market this year including seven of our 10 largest institutional commingled funds. We’re observing a flight to larger higher quality managers as investors are consolidating their allocations with preferred managers. Not only does this scale benefit us in fundraising, but it could enhance our competitive advantages as other players have less capital to deploy.

As an example, late last year, we launched our sixth European direct lending funds and most of the predecessor funds largest investors are working towards making a commitment in the first close. We expect to have a substantial first close in this fund in late Q1 or early Q2. We also recently launched our third US senior direct lending fund and expect to see similar demand for that fund as well with the first close slated for the second quarter. The total capital for the previous vintages for these two European and US direct lending funds was just over $30 billion combined including fund leverage. Additionally, the second vintage of our alternative credit fund is in the market and we anticipate a first close in late March or April. As a reminder, our alternative credit strategy deployed flexible capital, focused on large diversified portfolios of assets that generate contractual cash flows.

The fund carries a unique performance fee structure where 10% of the carry, half from the investment team and half from Ares goes towards charitable initiatives tied to global education, fighting global hunger, and the Ares Charitable Foundation. Initial investor engagement has been very active across all three of these large private credit funds and we expect strong demand for all of these products. We recently launched fundraising for our seventh corporate private equity fund, which we believe is particularly well suited for the current volatile market environment due to the team’s flexible approach and ability to invest in distressed for control investments in addition to traditional buyout transactions. Turning to deployment. Despite the lower overall transaction activity, our market share gains in private credit continued to drive strong aggregate investment activity across the platform.

In Q4, we deployed $21.8 billion of capital, representing a 19% increase compared to the third quarter. On a full year basis, we deployed $79.8 billion, which was flat compared to the $79.7 billion we invested last year which we believe is pretty remarkable given the slowdown in overall deal activity year-over-year. This drove our fee paying AUM to $231.1 billion, a 23% increase compared to last year. We continue to see very attractive investment opportunities across our private credit funds with all-in yields and fees on first lien direct loans of 10% to 13% with good covenant packages. In opportunistic real estate equity where we just held the first closing in the fourth quarter, we’re beginning to see a small number of investment opportunities come to market, driven by liquidity pressures.

In our PE business, our special opportunities team has been active with over $650 million deployed in the quarter in a mix of rescue capital, enterprise value-enhancing transactions, and stressed or distressed public credit purchases. In our secondaries business, we’re seeing a growing number of both LP- and GP-led opportunities as certain LPs seek liquidity and fund sponsors seek to accelerate liquidity into legacy fund vehicles. Overall, among our many strategies that can take advantage of constrained liquidity in the market, we’re seeing more activity for our private capital solutions. Going forward, with nearly $85 billion of available capital and several large first closes for our large commingled products in the coming months, we expect to have a strong capital base to take advantage of the market opportunities for our clients.

I mentioned earlier that our affiliated insurance platform is gaining momentum after launching the annuity origination business in June. In the second half of 2022, Aspida nearly doubled its AUM to $6 billion, up from $3.6 billion in June including an additional $1.4 billion in the fourth quarter. We’re now building an attractive portfolio of assets without the issues associated with the legacy back book. As we seek to raise additional third-party capital, we expect to scale our affiliated insurance platform further in the coming years. Our portfolios are generally defensively positioned as we head into the New Year. With nearly 60% of our invested assets in floating rate credit, we continue to benefit from rising interest rates. And these assets are generally in the top half of the capital structure which further enhances our positioning.

In our US and European direct lending portfolios, we continue to see solid fundamentals, low defaults and resilience in our credit metrics with weighted average loans to value at year-end of 46% and 49.5% respectively, as well as continued strong EBITDA trends with last 12 months’ comparable growth of 9% for both the US and European portfolios. Our global real estate portfolio continues to see strong rental growth and high occupancy rates, with our highest conviction sectors of industrial and multifamily, which comprises approximately 77% of our gross assets. In addition, other adjacent high-conviction sectors such as single-family rental, self-storage and life science accounted for another 11% of gross assets. Our non-traded REIT, AREIT reported multifamily rent increases on new leases and renewals of 13.1% and 11.6% respectively.

In our AI REIT industrial-only portfolio, 99% of our space is leased. And during the year over 10% of the portfolio issued new or renewed leases at an average increase of 47% growth above the comparable or previous lease rate. Our global real estate portfolio overall continues to be underweight in office with less than an 8% allocation across the global portfolio and most of our exposure in the US is in the real estate debt that’s largely senior in the capital structure. Our private equity group’s portfolios continue to perform with year-over-year EBITDA growth of 9% and are positioned in more defensive sectors like healthcare, business services and light industrials. We believe that the strong secular growth that we continue to experience across our business is ultimately a result of our strong and consistent performance.

In 2022, nearly all of our strategy composite returns outperformed comparable public markets for the year. And now I’d like to turn the call over to Jarrod for comments on our financials and additional details on the performance of our funds. Jarrod?

Jarrod Phillips: Thanks, Mike. Good afternoon, everyone and thank you for joining us today. I’ll begin with a review of the fourth quarter and the full year. Then I’ll provide an update on our outlook for 2023 and beyond. As Mike stated, we experienced strong growth in nearly every financial metric, including management fees, fee related earnings, realized income, AUM and FDAUM for both the fourth quarter and the full year when compared to the prior year. In 2022, as we’ve seen in past markets, Ares Management fee centric and FRE-rich business model delivered strong results despite the turbulent economic environment. Starting with our revenues, our management fees increased 23% for the fourth quarter and 32% for the full year, driven primarily by the strong deployment of our invested capital.

Our management fee stability remains a key differentiator for our business model and enables us to better manage short and long-term market dislocations. As of year-end, 95% of our management fees were derived from either perpetual capital or long dated funds, which reduces the risk of significant redemptions even during severe market movements. Other fee income was approximately $25 million for the fourth quarter and was just shy of $95 million for 2022, up 11% and 90%, respectively. Other fee income was spread pretty evenly among capital structuring, origination and administrative fees and credit funds, development leasing and acquisition fees in real estate and retail distribution revenues. For the full year 2022, we generated $239.4 million of fee related performance revenues or FRPR compared to $137.9 million for the full year 2021.

The strong contribution from FRPR in 2022, of which about 94% was recognized in the fourth quarter reflects $164.3 million in annually measured performance income from our two non-traded REITs and $71.5 million in performance income from nearly 30 perpetual life credit funds that are eligible for two silent fee payments. As a reminder, the large increase in the non-traded REIT FRPR was partially driven by the fact, we received 100% of the FRPR in 2022 versus only 50% in 2021 as we closed the acquisition of Black Creek on July 1, 2021. Our underlying base of funds have generated FRPR continues to expand as AUM and these funds increased more than 35% to $22.4 billion during 2022. Looking forward, the outlook for FRPR from our non-traded REITs is harder to predict compared to our credit funds.

We think it’s reasonable to expect growth in FRPR in our credit funds in 2023 due to trajectory of interest rates as we anticipate earning higher base rates and fee income above fixed real rates. Our real estate funds will require some modest depreciation to meet our hurdle rates. And, therefore, the related future FRPR is harder to estimate. As it relates to our FRE, our FRPR margin when considering the associated compensation expense was 37.6% in 2022. Our margin on FRPR should remain below 40% due to our contractual compensation structure of 60% paying to employees and some associated payroll taxes. While the lower margin on our FRPR negatively impacted our overall FRE margin in Q4, it was still very accretive to our FRE during the fourth quarter contributing $85 million to FRE with $64 million from real estate and $20 million from credit.

For the fourth quarter, FRE totaled $335.7 million, an increase of 33% from the fourth quarter of 2021, driven by higher management fees and FRPR. For the year ended December 31, 2022, FRE totaled $994.4 million, an increase of approximately 40% from the prior year. FRE accounted for more than 87% of our realized income, up from approximately 80% in 2021 and 74% in 2022. Our FRE-rich earnings are a key differentiator for Ares and we believe they add consistency and predictability to our overall earnings. This can also be seen by our compound annual growth rate and FRE over the past three and five years of 42% and 36% respectively. Our FRE margin for the fourth quarter totaled 39.9% and 40% for the full year. Excluding FRPR, which has a lower margin due to the compensation and related taxes that I previously mentioned, our margin was 40.6% for the fourth quarter and 40.2% for the full year.

We continue to be on track to achieve our goal of 45% run rate FRE margin by year-end 2025, even including the margin drag from FRPR. Regarding the pacing of our margin expansion towards our 45% target in 2025, we have now made many investments in front and back office personnel in preparation for the upcoming fundraising cycle. The higher staffing levels dampened our margin expansion in 2022 and the full year effect of these hires will carry over into 2023. As we raised and deployed capital from these large commingled funds, coupled with an expected slowdown in headcount growth, we expect to see margin growth resume in the back half of 2023 with a larger step-up in 2024 and 2025. Our realization activity increased in the fourth quarter, with realized net performance income totaling $91 million, an increase of 10% over the fourth quarter of 2021.

Net performance income included $36 million from our credit group, largely from European waterfall distributions and incentive fees from our US and European direct lending funds. Our private equity group also realized $33 million of net performance income largely related to EU waterfall distributions from ASOF fund. Realized income for the fourth quarter totaled a record $418 million, up 23% from the fourth quarter of 2021. For the full year, realized income exceeded $1.1 billion, a 28% increase from 2021. After-tax realized income per share of Class A common stock was $1.21 for the fourth quarter, up 42% versus the fourth quarter of 2021. For the full year 2022 after-tax realized income of $3.35 per share of Class A stock was up 30% versus 2021 and exceeded our 2022 dividend of $2.44 by 37%.

As of year-end, our AUM totaled $352 billion, compared to $341 billion for the third quarter and $306 billion as of year-end 2021. Our fee-paying AUM totaled $231.1 billion at year-end, an increase of 23% from year-end 2021. Our growth in fee-paying AUM was primarily driven by meaningful deployment across our US and EU direct lending special opportunities and alternative credit strategies, which pay management fees on invested capital. Looking forward to 2023, we believe we are well positioned to take advantage of further volatility in the markets and continue growing our fee-paying AUM. Our available capital was $85 billion as of year-end, representing significant future earnings potential. We expect our dry powder will increase as we enter a period of accelerated fundraise.

As a reminder, we earn most of our management fees upon deployment since the majority of our funds earn fees on invested capital. As a result, the prior vintages of these funds do not generally have step-downs on their management fees. We ended the year with $41.8 billion of AUM, not yet paying fees available for future deployment, which represents over $400 million in incremental potential future management fees. Our incentive eligible AUM increased by 11% from the end of 2021 to $204 billion. This amount $63.9 billion was un-invested at year-end. In the fourth quarter, our net accrued performance income stood at $832 million, a decline of $56 million from the previous quarter, due to $75 million of net realizations. Of this, $832 million of net accrued performance income at year-end approximately 65% was in European style waterfall funds.

For the full year, our net accrued performance income increased by 3% versus the prior year. As we highlighted at our Investor Day, we have a substantially growing number of European style waterfall funds that accrued performance fees that pay the vast majority of their performance fees in the final years of the fund life. For example, European waterfall style funds, totaled nearly $100 billion of incentive eligible AUM at year-end. In 2022, we realized $114 million in net performance income from European waterfall style funds, which represented 79% of the total net realized performance income for the year. Importantly, we expect net performance income from European style funds to continue to account for the significant majority of our total net realized performance income in the years ahead.

As we laid out at our Investor Day in 2021, we expect to see a continued increase in our European style funds as older release funds mature and enter harvest periods. Last quarter, we stated we had approximately $300 million in European style funds that were past their investment period, and expected approximately $40 million to be recognized in the fourth quarter. In the fourth quarter, we actually recognized $67 million of performance income from European style funds. Now at year-end, due to the interest generating nature of many of these accounts above their hurdle rates, we still have more than $300 million in European style funds past their investment periods. We now expect net realized performance income from European style funds of approximately $100 million and $175 million in 2023 and 2024 respectively.

Beyond 2024, we currently expect annual realized net performance income to continue to grow as some of our larger direct lending commingled funds raised over the past few years entered their harvest period. As an update since our Investor Day of August 2021, the expected aggregate future net realized income from European waterfall funds raised through year-end 2022 has increased by approximately $1 billion to about $2.5 billion. In terms of our American style funds monetizations will be market dependent and episodic, and depend on market conditions and other factors. We have approximately $250 million in accrued net performance income and American style funds past their investment periods. For the full year in 2022, our effective tax rate on our realized income was approximately 9%, assuming all operating group units were exchanged fully into common shares.

For 2023, we would expect a slightly higher effective tax rate ranging from 10% to 15% on a fully-exchanged basis, with the range depending on the level of realization. As Mike touched on earlier, the growth in our AUM in part reflects our consistent long-term performance and 2022 was another strong year. In credit our US senior direct lending strategies generated gross returns of 1.9% for the quarter and 9.5% for the full year. Our publicly-traded BDC Ares Capital just reported record fourth quarter core earnings and had another strong year, generating a net return of 1.9% for the fourth quarter and 7.1% for the full year. Our junior direct lending strategies generated a gross return of minus 0.8% for the quarter and positive 2.5% for the year, with much a decline related to market-based adjustments particularly impacting the fixed rate securities in those portfolios.

Our European direct lending strategies generated gross returns of 2% for the quarter and 10.5% for the year. All of these strategies have returned significantly in excess of the comparable liquid markets for the full year. Although, US real estate equity composite gross returns declined 6% for the quarter, but were up 11.3% for the year, and our European real estate equity funds gross returns declined 7% in the quarter, and declined 3.8% for the year, still significantly outperforming the public REIT indices. Despite strong fundamentals in the industrial and multifamily sectors, market values have broadly declined as higher interest rates have weighed on discount rates and exit multiples. Within our non-traded REITs, AREIT generated a 0.3% net return for the fourth quarter and a 12.7% return for the year and AI REIT generated a net return of 0.1% for the fourth quarter and 26.8% for the year.

Our performance was supported by the strong rental growth and occupancy statistics that Mike referenced earlier. In private equity both of our strategies significantly outperformed the broader equity markets during the year. Our corporate private equity composite generated gross returns of 0.7% for the quarter and 4.3% for the full year. Our Special Opportunities Fund I generated a gross return of 3.9% for the quarter and 9.1% for the full year. Our secondary strategy reports returns on a one-quarter lag basis. Private equity secondaries generated gross returns of minus 5.6% for the quarter and minus 4.9% for the year. Real estate secondaries generated gross returns of minus 1.8% for the quarter and a positive 20.3% for the full year. At the beginning of the year, we look to set our quarterly dividend at a fixed level for the coming year.

Based on the significant outperformance of our fee-related earnings relative to our dividends and our strong growth prospects, we’ve elected to increase our quarterly dividend to $0.77 per share of Class A and non-voting common stock, or $3.08 annual, a 26% increase from the $2.44 dividend per share in 2022, as Carl mentioned. We believe this new dividend level is appropriate based on our current level of FRE and our growth prospects from our significant dry powder for deployment our flexible strategy and large fundraising pipeline. Before I turn the call back to Mike, let me touch on our forward outlook. As you will recall, we gave the market long-term guidance for 2025 at our Investor Day in August of 2021, including a target of $500 billion and more in AUM a run rate FRE margin of 45%, FRE growth of 20% per year and growth in dividends per Class A share of 20% per year.

Up to this point, I’m pleased to say we have meaningfully outperformed these expectations with over a 40% FRE CAGR from mid-2021 through the year-end 2022. As FRPR was not contemplated in our Investor Day, 20% per year FRE growth rate guidance, we would like to clarify that we expect a 20% or more annual growth in our FRE from 2022 through 2025 excluding FRPR from our non-traded REITs. We do expect to generate attractive levels of FRPR on a growing base of eligible funds, but the growth rate is naturally harder to predict. We remain on track to meet or exceed the other elements of our Investor Day guidance. I’ll now turn the call back over to Mike for his concluding remarks.

Michael Arougheti: Thanks, Jarrod. So we spent 2022 investing in talent and strengthening our front- and back-office teams to set us up for strong growth in the years ahead. We believe that we’re now in a position to capitalize on these investments with a large fundraising cycle, a strengthened capability to invest across a greater segment of the addressable market and an enhanced global platform. Based on the foundation that’s already been laid, we have good visibility into the next several years of growth. In addition, we’re seeing strong synergies, earnings contributions and future earnings potential from our recent acquisitions that have us all very excited. Our ESG and DEI teams are executing at a higher level as we continue to focus on our impacted areas.

Overall, our culture makes us a stronger workforce and better investors, as we strive to make a positive impact for our stakeholders and our communities. As it relates to potential new acquisitions, our recent transactions filled specific product gaps in areas that we identified as high-growth opportunities. We now have a broader platform to build businesses organically. And as a result, the bar for new M&A activity is naturally higher. That said, we’ll continue to look for strategic add-on acquisitions and strong growth areas, where we can leverage our platform advantages and bring attractive investment products to our LPs. Just this week, we agreed to purchase the remaining 20% of Ares SSG’s management business still owned by the original founders, with the closing subject to receipt of regulatory approvals.

Our purchase of the remaining stake was contemplated in the original agreement but both parties mutually agreed to accelerate the timing. In connection with this almost entirely all stock transaction, we’re planning to rebrand the business Ares Asia, and expect it will be our platform for continued growth in the Asia Pacific region. I’m proud and grateful to the incredibly hard work and dedication of our team and for all that they do every day to deliver for all of our stakeholders also deeply appreciative of our investors’ continuing support for our company and I want to thank you for your time today. And with that operator, I think we’re ready to open the line for questions.

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Q&A Session

Operator: Thank you. Our first question today comes from the line of Craig Siegenthaler from Bank of America. Please go ahead. Your line is now open.

Craig Siegenthaler: Hey, Mike. I hope, everybody is doing well?

Michael Arougheti: All good here, Craig. Thanks.

Craig Siegenthaler: So with US banks building up reserves and getting ready for a recession, we wanted to get an update on how Ares’ private credit portfolio is prepared for a rise in corporate defaults. And also what have you seen in the fourth quarter in January in terms of early credit quality indicators across your portfolios?

Michael Arougheti: Sure. I think Kipp’s on, so I’ll give you my view but I think the good news is given the size of ARCC and the fact that they just announced, it’s a good indicator of the state of play within the existing portfolios and probably a broader proxy for what we’re seeing across the private credit portfolios here at Ares. We announced that if you look at year-over-year EBITDA growth in that book and it was true for our European, it was about 9.1% LTM period-over-period. So while I think like many we’re seeing slower growth, there’s still good fundamental strength within that book. Two and we’ve talked about this on prior calls, a lot of these private credit assets both corporate and real assets are sitting higher up the balance sheet than in prior cycles and are benefiting from a significantly higher amount of equity subordination than we saw in the last two credit downturns.

And so if you look at positioning in terms of loan to value, they’re generally speaking in and around 45% loan to value. And the reason I mention that is I think a lot of the impact from rising rates ultimately will be borne by the equity as the discount rate changes, valuation shifts and then there’s a value transfer from the equity to the debt. Needless to say as we’ve seen base rates go up close to 500 basis points, it does put strain on interest coverage. Interest coverage in the portfolios though given the low starting point is still at levels that make us comfortable and are consistent with where prior cycles were. So what makes us so unique Craig is we’re seeing strong fundamental performance and the conversation about defaults right now is actually happening at a time when rates are going up.

And earnings are not necessarily slowing, whereas, in prior cycles we’ve seen rates going down and earnings beginning to slow at a much faster pace. So from the private credit perspective, it’s a really interesting situation because we’re accumulating significant excess return ahead of a conversation about any potential defaults. To that point, I still believe that while we will see an increase in amendment activity and default activity, it should largely be beneficial to total return. And to put that in perspective if you look at where ARCC’s non-accrual rates stood at the end of the year, they’re about 1.7% on fair value, which is well-below historical averages. So pretty unique position in terms of performance, a lot of liquidity and dry powder on the platform to both defend existing exposures and play offense if need be, but I think a pretty interesting vintage across the Board for private credit.

Kipp, I covered a lot there. I don’t know if you wanted to add?

Kipp deVeer: I think you got most of it, Mike. Craig, the only other thing that we said on this call for the BDC yesterday was that we did see some modest increases in amendment activity through the fourth quarter and into the first and I’d expect that will continue throughout the year, but it’s not a huge cause for concern from our standpoint.