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Ares Management Corporation (NYSE:ARES)
Q1 2020 Earnings Call
May 6, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to Ares Management Corporation's First Quarter earnings Conference Call. [Operator Instructions]

As a reminder, this conference call is being recorded on Wednesday, May 6, 2020. I will now turn the conference over to Mr. Carl Drake, Head of Public Company Investor Relations for Ares Management.

Carl G. Drake -- Partner, Head of Public Investor Relations and Communications

Good afternoon, and thank you for joining us today for our first quarter 2020 conference call. We hope everyone is safe and healthy. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Michael McFerran, our Chief Operating Officer and Chief Financial Officer. In addition, Bennett Rosenthal, co-Chairman of our private Equity group; Kipp deVeer, Head of our Credit Group; Bill Benjamin, Head of our Real Estate Group; Scott Graves, Co-Head of our Private Equity Group and Head of Special Opportunities; and Joel Holsinger, Co-Head of Alternative Credit, will be available for the question-and-answer session.

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 under 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. 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. In addition, please note that our management fees include ARCC Part one fees. Please refer to our first quarter earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures. Please note, nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Ares Fund. This morning, we announced that we declared our second quarter common dividend of $0.40 per share, representing an increase of 25% over our prior year's quarterly dividend. The dividend will be paid on June 30, 2020 to holders of record on June 16. We also declared our quarterly preferred dividend of $0.4375 per Series A preferred share, which is payable on June 30, 2020, to holders of record on June 15.

Now I'll turn the call over to Michael Arougheti, who will start with some quarterly financial and business highlights.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Thank you, Carl, and good afternoon, everyone. We wish everyone well during these unprecedented and difficult times, and our thoughts are with those who have been affected by this crisis. We want to thank the first responders, healthcare professionals and those on the front lines, risking their lives for our communities across the globe. I also want to thank all of our employees here at Ares who are working harder than ever to drive our company forward through this challenge. It's really been remarkable to see the seamless transition our entire firm has made to working remotely and we are functioning at full capacity. I could not be more proud of the team. It's also nice to see so many of our portfolio companies directly supporting our communities, whether it's to pay medical, which is running the clinical operations for COVID Triage center in Chicago's McCormick Convention Center and delivering high-quality and safe care for non-COVID patients throughout the shelter in place period or convergent technologies, as an example, delivering solutions to enhance health security through thermal cameras, contactless access controls and identity management and tracking software. With respect to Ares, I'm going to spend a few minutes on why we believe that we're uniquely positioned to navigate this period, both offensively and defensively. Our team at Ares is broad, deep, and has worked together for a long time, including through past economic cycles. And as we've demonstrated consistently during our tenure, we're very experienced at navigating different and challenging economic environments. As many of you know, we grew faster through the GFC than in any 2-year period since then with AUM and management fees increasing at compounded annual growth rates of 39% and 28%, respectively, from 2007 to 2009. So while what we're all witnessing now is unique in many respects, our framework for navigating and responding to crisis is well established, and it centers first and foremost around our culture of collaboration.

Information, ideas and market insights flow across our platform through both recurring committee meetings, town halls, working groups and nimble point-to-point and cross team interactions. This has enabled us to navigate the early days of this crisis extraordinarily well. We've also had eight weeks of cross portfolio company calls to ensure that we're sharing best practices on employee and public health issues, technology, government and regulatory matters, supply chain management, ESG, et cetera. This all exemplifies what you often hear us refer to as the power of our platform, which supports exploring ideas and solving problems and pursuing opportunities across our businesses, geographies and our controlled portfolio companies. Now more than ever, we're relying on our collaborative culture to deliver optimal outcomes for all our stakeholders. Our first quarter hit several financial milestones that Mike will cover in further detail. Our results also reflect our resilient and cycle tested model. The first quarter was our 12th consecutive quarter of sequential fee-related earnings growth with FRE of $93.1 million, an increase of 31% from the same period last year. In addition to reporting record FRE, the first quarter was also a new record for management fees, a new record FRE margin since going public, record fee-paying AUM, which crossed $100 billion for the first time in our history and our second highest realized income. In addition, fundraising is off to a very strong start with over $6.6 billion raised during the quarter.

I do want to highlight certain key characteristics of our business that not only supported strong first quarter results, but also position us well going forward. First, we have a management fee-centric business model with most of our revenue coming from management fees that are primarily generated from permanent capital vehicles and long-dated closed-end fund structures. We experienced limited capital outflows, and our management fees are generally well insulated from mark-to-market fluctuations as we saw this past quarter. This provides us great visibility to growing fee-related earnings and dividends. Second, in addition to managing long-dated and permanent capital, we have always had a bias toward structuring funds and other mandates to be as flexible as possible. This allows us to invest between liquid and illiquid strategies, across capital structures and to pivot between regular way investing and special opportunities or distressed investing during periods of volatility.

Third, we tend to run our funds with a significant amount of dry powder and generally begin raising successor funds when predecessor funds are about 60% to 70% deployed. We went into the crisis with significant available capital to invest and we ended the first quarter with approximately $33 billion of dry powder. Next, similar to the fund level, we also believe in maintaining significant excess liquidity at the management company, and we run a balance sheet light model. For many reasons, we've never aspired to have a large balance sheet that takes outsized positions and investments. Instead, we pursued a balance sheet strategy that focuses on activities intended to grow our core earnings. Our balance sheet is strong with available liquidity of over $1.4 billion, no near-term debt maturities, no net leverage and no leverage with mark-to-market or similar attributes that would ever require us having to meet margin calls or other fundings.

Our liquidity positions us well to capitalize on potential strategic growth opportunities that this market should present to us. And last, our net realized performance fees are primarily driven by realizations from our closed end funds. Our long-term locked up capital means that we are not forced sellers of assets. And while valuations can move up or down, they reflect unrealized estimated fair value at any point in time, and are not necessarily reflective of where we would or expect to monetize investments in our funds in the future. On a related note, our capital base is meaningfully overweighted to more resilient credit-based strategies that invest at the top of the capital structure and, by definition, take the last loss on investment. Not only does credit provide more stability and values, but it is also easier and quicker to deploy in volatile markets when equity risk is more difficult to price.

Now turning to the markets. We expect the impact of the COVID-19 pandemic to impact the economy in three general phases, and I'll discuss how Ares has responded or plans to respond in each phase. In the first phase, beginning in early March and continuing through the end of the first quarter, we witnessed severe disruption in market prices. It began with the equity markets led into the high-yield and leveraged loan markets, and then across the spectrum of almost all risk assets, including the private markets. The healthcare crisis and government shutdowns triggered almost immediate impacts to liquidity of businesses. And the disruption impacted nearly every company to varying degrees. Fortunately, as a percent of our firmwide AUM, we have relatively small exposure to the "ground zero" industries most heavily impacted assets, such as oil and gas, travel and leisure and retail, but we're certainly not immune. In this first phase, we focused on doing everything we could to understand the liquidity needs of our portfolio companies and to protect value in the existing book. On the investing front, we began actively using our dry powder to invest in and trade distressed assets, while retaining significant dry powder for what we believe would be a long drawn-out recessionary environment.

In the second phase, where we believe we are now, significant fiscal and monetary stimulus has been announced and it is finding its way into the markets and the economy, albeit in some cases, unevenly and slowly. Following this massive fiscal and monetary response, there's been a meaningful rally in the public equity and credit markets, which began in late March. But we would argue that the recent performance in many markets is at odds with the current fundamental economic reality. Liquidity has not yet reached certain segments effectively and a significant need for rescue capital and liquidity remains across the private markets. This period of stagnation could be with us for this foreseeable future, and it could result in an extended period of continued market volatility due to the depth of demand shock on our consumer-driven economy. This market environment plays into our strong relationships across the private markets of North America, Europe and soon to be Asia. In general, we're focused on providing rescue capital primarily to high-quality second order impact companies or those companies not in the most affected industries. We continue to find some attractive opportunities in the liquid markets as well.

And in the third phase, once a significant percentage of the working population is fully back to work, we expect to return to a "new normal" market environment. We would then envision a prolonged period with less competition, where we'll be able to invest in great companies and assets at attractive values. Importantly, we believe that our flexible strategy with the ability to invest in liquid and illiquid assets using our deep research and private markets expertise works well in all stages. Our investment strategy flexes to a particular market environment which is why we thrived in so many diverse environments of our company's history.

Many of you have asked us about fundraising in this environment. The good news is that we've continued our fundraising momentum even after the outbreak of the pandemic. For example, five of our commingled funds together closed on more than $2 billion of capital in the month of March. And then during April and into early May, we've received additional inflows of approximately $2 billion across strategies in our Credit, Private Equity and Real Estate groups. We continue to expect a strong fundraising year in 2020. Our past success has been driven in part by expanding relationships with our existing clients through reups into larger existing strategies and new capital into other Ares strategies. Historically, existing investors have accounted for 70% to 80% of our fundraising each year since our IPO. The first quarter was no exception as our direct fundraising from existing investors accounted for 74% of our total quarterly fundraising. This puts us in an advantageous competitive position in the current virtual environment as LPs, in general, are more focused on reups to existing funds or new commitments to existing managers rolling out new funds. We're fortunate to be in a position with a large number of successor funds, coupled with some actionable new funds that can invest well in this market environment. Some of our best-performing fund vintages were raised and deployed during the last global financial crisis, and I think investors recognize the attractive investment opportunities that can arise during periods of significant volatility.

As discussed in our call in February, we have at least eight large successor funds and new comingled funds either in the market prelaunched or to be launched within the next six to 12 months. This include our special opportunities fund, our 6th corporate private Equity fund, two real estate private equity funds, our alternative credit flagship fund, our 5th European direct lending fund, our second junior capital private credit fund and our second U.S. senior direct lending funds. Altogether, these represent at least $25 billion of incremental targeted capital all in strategies and formats that can actively take advantage of the current and future distressed markets. Our fundraising efforts will also continue with our strategic managed accounts and strategic partnerships, our public funds, smaller co-mingled funds and other closed-end vehicles. We're making significant fundraising progress on our funds that are in the market, many of which are also seeing an expanded investment opportunity set as a result of the current market dislocation. Our special opportunities fund, which focuses on illiquid and liquid distressed investing, including rescue capital investments has resonated even more with investors in the current market. With that in mind, we've closed on approximately $3 billion for this fund, which well exceeds the fund's target of $2 billion. The special opportunities team has been actively deploying capital with $1 billion invested since inception, split about half in privately negotiated and half in secondary distressed investments most of which was invested in the last 60 days.

We're also nearing a meaningful first close for our 6th flexible capital private equity fund. As a reminder, our flexible capital private equity strategy pivots primarily between distressed investing, and prudently leveraged by out investing. Not surprisingly, in the current environment, the team is focused almost exclusively on distressed investing, and we believe that there's a significant opportunity for this fund to invest in high-quality companies that had issues with their balance sheets and/or our need of liquidity from a financial sponsor, such as Ares that can help them chart a path back to growth. In the midst of the dislocation, we also held additional closings for our U.S. opportunistic real Estate PE fund, bringing the total raise to date of $1.1 billion against a target of $1.5 billion.

This strategy also has a focus on buying stressed high-quality real estate assets. We also held a first closing of more than EUR500 million for our European value-add real estate PE fund, and our real estate debt funds continued fundraising with another $400 million of inflows during the first quarter. We've seen strong interest in our flagship alternative credit fund. This fund pursues an opportunistic strategy, focused on asset-oriented investments. Given the current market disruption, this strategy's opportunity set has meaningfully expanded and the size of the investment pipeline materially increased post COVID-19. This fund also includes an innovative feature that allocates at least 10% of the fund's performance fees to global health and global education charities.

This fund was launched last year prior to the global health crisis and has always contained this profit sharing and charitable mission. The fund closed on $786 million in March and total capital raise to date stands at approximately $1.3 billion. We expect to hit or exceed our target of $2 billion in the near future. Also, we just launched our 5th European Direct lending fund this week. Based on our leadership position and the opportunity set in European direct lending, we currently expect that this fund could be the largest private co-mingled fund in our company's history. The other credit funds that I mentioned are expected to be launched later in the year or early in 2021. So as you can see, we expect a significant fundraising year despite the challenges that some investors face. During the full first quarter, our drawdown funds invested more than $4 billion, mostly across our credit platform and direct lending, and alternative credit as we focused up the balance sheet in high-quality credits and assets. With the extreme volatility in the first quarter, we were also very active trading in the liquid markets where distress and dislocation were most prevalent. Post the COVID outbreak, we traded approximately $5 billion in liquid securities in March, an increase of more than 50% year-over-year, bringing total trading volumes to over $11 billion in the quarter. This represents a 30% increase from the first quarter of last year and highlights our ability to take advantage of these market dislocations.

Some of the best investment opportunities right now have pivoted into the private markets where our sourcing advantages can play an even greater role. It is now important once again to use our relationships to gain access to the highest quality opportunities for companies needing rescue capital or critical financing for acquisitions in market segments less impacted by the disruption. We expect deployment to pick up pace throughout the year with a focus across our credit, distressed, rescue capital, alternative credit and opportunistic real estate businesses. Investment spreads and structures have markedly improved across the credit landscape as many competitors and banks are not open for business, which we believe will position us to boost future returns. And from a performance standpoint, our Q1 fund performance across our credit, PE and real estate strategies naturally reflects the significant disruption that occurred in March. On a positive note, our funds generally exceeded their relevant public market indices. Our private equity composite was down 9.3%. Our European and U.S. real estate private equity strategies declined between 3.5% and 4.2%, respectively. And our credit strategies declined anywhere from 11.8% and 12.2% on the liquid side to between 0.4% and 7.7% on the direct lending side in our significant funds. Importantly, our investors are patient, and they measure our fund performance over much longer time periods and on a realized basis. Of course, the market volatility that impacted our fund values also may provide opportunities for us to make long-term investments at more interesting entry points.

So maybe lastly, before I hand the call over to Mike, I want to provide some updates on certain of our recently announced strategic activities. As many of you saw, we formalized a strategic partnership with Sumitomo Mitsui Financial Group and Sumitomo Mitsui Banking Corp in late March. We have a long standing, mutually rewarding relationship with SMBC, and we had been discussing the potential for a strategic partnership for over a year. Through this partnership, we expect to gain strategic distribution in the Japanese market with their broad client base. And we can also partner with their significant balance sheet to help us grow existing and to launch new businesses. We expect a meaningful earnings contribution from the partnership synergies over time. We also aligned interest around the partnership through a sale of 4.9% of our common equity to SMBC, which we believe will be accretive over the long term. While the timing coincided with the early days of the crisis, it's our view that this capital is even more valuable than it would have been before. This equity capital puts us in a position to play offense in this opportunistic investment environment where we can hopefully scale our business in areas that are highly strategic for us. Second, our SSG capital transaction is proceeding smoothly, and we now expect a closing in late June or early July, with approximately $6 million in AUM. We're very excited to bring on board a leading, secured and special opportunities investor in the Pan Asian region at a time where we expect it to be very opportunistic to invest. Similar to us, they continue to have uninterrupted fundraising.

And third, I wanted to provide an update on our insurance Solutions initiative, which, as you know, we call Aspida Financial. We expect to close the platform acquisition of Pavonia Life in the second quarter or early third quarter. And there are many interesting acquisition opportunities in the insurance sector, and we've been building a pipeline of reinsurance transactions as well. After closing, we'll soon be prepared to roll out our life insurance and annuity products in an environment that will be more advantageous than before as retirees continue to struggle to find quality investment alternatives and insurance products in the current volatile and low interest rate environment.

And now with that, I'm going to turn the call over to Mike McFerran for his remarks on our business positioning and more detail on our financial results. Mike?

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

Thank you, Mike. Hello, everyone, and thank you for joining our call today. No words can do justice to explain the extraordinary and tragic nature of what's transpired in recent months, and I hope all of you are safe and well. While we are doing this call from our respective offsite locations, and I miss the in-person interaction with my colleagues. I will echo Mike's comments by saying that the power of our platform with a culture deeply rooted in collaboration has never been more evident or valuable than it is right now. While our global team continues to work remotely, our culture combined with our truly incredible technology and operations teams, have a highly operating highly effectively from our various locations. I'll start my remarks with some key points in the quarter and then provide a more comprehensive review of our results and financial position.

As Mike highlighted, the first quarter represented our 12th consecutive quarter of fee-related earnings growth and reflected some key first time milestones with fee-related earnings exceeding $90 million, our margin growing to a new high of 34%, and our fee-paying assets under management exceeding $100 billion. Valuations across most, if not all asset classes globally have been negatively impacted. Our portfolios were not immune to the broad market dislocation as reduced valuations decreased our net accrued carry from year-end levels and reduced the value of our balance sheet portfolio.

Although valuations were down, as Mike stated, our funds exceeded their public benchmark indices across our credit, private equity and real estate strategies. Notwithstanding the challenging market backdrop, realization stemming primarily from our private equity and real estate businesses enabled us to report $134.1 million of realized income for the quarter, which is our second highest quarter of reported realized income since our IPO in 2014.

Now I'll take you through the results in more detail. Fee-related earnings for the quarter totaled $93.1 million, an increase of 31% from the first quarter of 2019. I will also note that this represents an increase of 5% from the last quarter, which translates into a 20% annualized growth rate quarter-over-quarter. We are off to a good start to the year. And I will reiterate our expectation that we expect to grow fee-related earnings year-over-year by 15% or more.

Fee-related earnings growth is driven by 17% management fee growth from the prior year period compared to growth in combined compensation and general and administrative expenses of 12%. The faster growth of management fees versus expenses reflects the nature and life cycle of our revenue model. The majority of our AUM from closed-end funds pays fees and deployed capital. However, we incur expenses on our capital raising, investing in operating activities before we achieve revenue ramp as we are deploying the capital, which is reflected in AUM, not yet paying fees or shadow AUM.

In other words, we are growing management fees, while much of the expense related to that revenue has already been reflected in our prior financials. This enables us to continue to grow our margins, which is highlighted by our FRE margin growing to 34% from 32% for the fourth quarter of last year and 30% for the first quarter of 2019. I do want to highlight that we are reiterating the 2020 margin guidance we gave on our call last quarter, which is that we expect to report a 34% margin for the year, and we continue to expect to achieve a 35% or better run rate margin during 2020.

With respect to general and administrative expenses, this quarter's results include approximately $3.3 million of expenses related to the ongoing SEC matter we discussed last quarter related to certain compliance policies and procedures. We believe this accounts for all of the expenses we will incur related to this matter. Our second quarter results will reflect an insurance recovery of $2.5 million, which offsets most of the expenses we recognized this quarter.

Notwithstanding this, we are seeing reduced G&A expenses as a result of the current environment, most notably from reduced travel expenses. We do expect that through growing operational synergies, including benefits we are capturing from our technology investments and from our Mumbai office that we opened last year, that our full year 2020 G&A expenses should be flat or below the aggregate $178.7 million that we reported for 2019. Realized income for the quarter totaled $134.1 million, which represents an increase of $29.5 million or 28% as compared to the first quarter of 2019. After-tax realized income per Class A common share, net of preferred stock distributions was $0.45 for the first quarter, an increase of 28% from the first quarter of 2019.

On last quarter's call, we highlighted that we estimate our 2020 effective tax rates to be in the 15% to 18% range for realized income and in the 11% to 8% range on fee-related earnings, assuming 100% of our shares were converted to Class A common basis. We still think these estimates are appropriate for 2020. With respect to net performance income realizations going forward, we have moved from a general market backdrop that was favorable for realizations to one that is not, at least for the near term.

While there still will be opportunities for realized income to exceed fee-related earnings this year, current and anticipated market conditions for the foreseeable future are clearly far more conducive to making investments to grow long-term value as opposed to harvesting gains today. Realizations during the first quarter combined with downward fair value adjustments as of March 31 did reduce our net accrued performance fees to $235.5 million at quarter end from $348.2 million as of December 31, 2019. Given our FRE-centric business model, fluctuations in performance-related income have a minimal impact on our financial and liquidity position and do not affect our dividend, which, as you know, is pegged to FRE.

Next, let me spend a few minutes on our AUM and related metrics. Our AUM at March 31 totaled $148.6 billion compared to $148.9 billion at December 31, and is an increase of 9% from the prior year. AUM this quarter benefited from new capital commitments totaling $6.6 billion and our acquisition of CLO management contract agreements totaling $2.7 billion, which were offset by $5.7 billion of market value depreciation and $3.7 billion of distributions from income and realizations by our funds during the quarter.

Going forward, we do expect AUM to be partially bolstered by the muted pace of realizations throughout the year. Our fee-paying AUM increased over 17% year-over-year as a meaningful amount of our AUM has been converted to fee-paying AUM upon investment. We ended the first quarter with $102 billion of fee-paying AUM, which is a great milestone, as it represents the first time in our history that we have exceeded over $100 billion of fee-paying AUM.

We ended the quarter with available capital of $33.2 billion, representing approximately 22% of our AUM as of quarter-end and had $23.1 billion of AUM not yet paying fees, of which approximately $21 billion is available for future deployment with corresponding annual management fees totaling $199.8 million. The last metric I wanted to cover is incentive eligible AUM, which totaled $84.5 billion at quarter-end. Of this amount, $22.4 billion was incentive generating and $25.9 billion was uninvested at quarter end. While asset price declines in the quarter reduced our accrued net performance fees as I previously referenced, we believe we are uniquely positioned to create meaningful, long-term value through future performance fees. The combination of our dry powder our broad and diversified proprietary investment sourcing capabilities, the flexible nature of our funds, and most importantly, our culture that is deeply rooted in collaboration has us well positioned in this environment to make investments patiently in the quarters ahead that we believe will be a source of long-term performance fee generation in the years ahead.

Before handing the call back to Mike, I do want to address our financial position as of quarter end. We ended the quarter with nearly $1.2 billion in cash and cash equivalents on our balance sheet, with $800 million drawn against our $1.1 billion revolving credit facility due in 2025. This gives us more than $1.4 billion of available capital and liquidity, as Mike mentioned. Subsequent to quarter end, we elected to reduce our borrowings and our revolver to $500 million. And after this pay down, we continue to have in excess of $850 million in cash on our balance sheet. We sit here today very well capitalized with no net debt, no near-term debt maturities and no mark-to-market balance sheet leverage. We are very well equipped to be nimble and strategically focused to pursue what we believe will be a broad set of unusual opportunities to leverage our capital for growth in the time periods ahead.

With that, I wish all of you and your families and loved ones, health and safety in this difficult time. I will hand the call back to Mike.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Thanks, Mike. So in conclusion, we believe that our business model is not only resilient but also well positioned to thrive in what we expect will be a continued volatile market environment. Our management's fee-centric model, rooted in credit and flexible strategies, coupled with our balance sheet light model and strong balance sheet puts us in a strong position to navigate these times. It is during these volatile periods that we believe our organization and the power of our platform rises to the occasion and shines through. We don't view this as being an economic cycle where we'll simply snap back to yesterday anytime soon, rather, we project a long U-shape recovery, and with that, an unusual and interesting period ahead with its share of challenges, but also it share unique investment opportunities.

In times like these, having investment sourcing, underwriting and portfolio management capabilities are critical and having broad access to capital is key. And to survive, but not just survive, but to succeed, we need to be well positioned with both, and we believe that we are. I echo Mike's comments on wishing everyone safety and health. I look forward to updating you on our progress on next quarter's call, and I'd also like to end by thanking the entire team one last time for all their hard work and dedication these last couple of weeks. As always, we appreciate your time and support for the company and your time today.

And with that, operator, we'd like to open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question today will come from Robert Lee with KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great, thanks guys. Hope everyone is doing well.Maybe, just Mike, appreciate all the comments on fundraising, but maybe going back to that a little bit. Could you you have a lot of things still in process, but can you maybe get a little more granular color just on how maybe the timing or pace may be impacted versus kind of what you would have thought on the fourth quarter call, maybe particularly around kind of some of the larger funds, the funds? Does it feel like it's going to take an extra couple of quarters? Or feels like given your flexible mandate, it could happen as quickly as you originally thought?

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Yes. Out of now, everything is closing kind of as originally scheduled at target size. And as you heard in the prepared remarks, we've actually been pleased in certain situations like our special opportunities fund and our alternative credit fund, where we've actually seen accelerated fundraising, just given that those strategies are particularly well suited for the current environment. So as we sit here today, we're not actually seeing any change in terms of the pacing. Obviously, that could change as we get deeper into this as investors are dealing with things like denominator effect and challenges of working remotely. But as of now, we're not forecasting that.

Robert Lee -- KBW -- Analyst

Maybe as a follow-up to that. I mean, you did touch on with kind of reups being a focal point or do you get a sense that investors are reupping at maybe higher levels than you originally thought, just given the environment and your strategies?

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

Yes. I mean, as we said, we had eight funds that are in the market or soon to come to market, totaling over $25 billion that all can invest well into distress. And so I think our investors have a pretty nice selection of strategies to choose from to try to take advantage of the current dislocation. I think the reups, and we've talked about this on prior calls pre-crisis, there was an overarching trend of larger managers taking more wallet share. I think that's accelerating now. Obviously, it's easier for an LP to underwrite an existing manager. There are also some nuances where certain investors actually need face-to-face meetings by our regs. And so I think if you're an existing manager with a good track record and a deep relationship, it's just a lot easier, particularly remotely, to focus on a reup. So we are actually seeing some of that getting reflected in larger commitments on rep, which I think is just a reflection of people maybe allocating more to some of the larger existing managers than the new funds.

Robert Lee -- KBW -- Analyst

Great, thanks for taking my questions.

Joel Holsinger -- Partner, Portfolio Manager and Co-Head of Alternative Credit

Thanks, Rob.

Operator

Our next question will come from Ken Worthington with JP Morgan. Please go ahead.

Ken Worthington -- JP Morgan -- Analyst

Hi, good morning or good afternoon depending on where you are. In the discussion of the three phases of investment opportunities, you indicated less competition in Phase 3. Can you flesh out those comments on the competitive landscapes competitive landscape with regard to the banks, to what extent and maybe where you are seeing banks as a bigger competitor? And how you think or what makes you think the pullback in the banks as competitors will last here? And to what extent, if any, are the government programs actually accelerating or might accelerate the banks sort of return as competitors?

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Sure. Thanks for the question, Ken. So just to clarify the comment, it wasn't really geared just toward competition from banks, I think it was more a broader comment just about what the competitive set will look like on the back end of this. And what we have seen in every cycle that we've managed through is a consolidation of market share and market position coming through financial crisis. So we would expect to see reduced competition and reduced liquidity in the hands of competitors across the entire competitive set that would be consistent with our past experience and consistent with what we're seeing in the market now. With regard to the banks, obviously, we don't compete directly with them, but for in certain segments of our direct lending business, particularly the higher end of size range of potential borrowers. Needless to say, in this environment, while we're still active the banks are not active underwriting and syndicating leverage finance product.

I think as importantly, you saw this roll through some corners of the market before the stimulus was put forward, and it's actually still happening in certain segments of the market, where there are margin facilities or repo lines or swap facilities, the banks have been moving to get liquid as I think most investors are. And we have seen a reduced appetite to commit new capital across the board from the banks. So I would characterize the bank behavior more as what we're seeing in terms of them being liquidity providers into the market versus them being head-to-head competitors with us. And so for the last 20 years, I think people have been asking us about bank competition returning and the potential impact on our business. We historically have not really competed head-to-head, and I don't expect that to change. With regard to the government programs sorry, go ahead.

Ken Worthington -- JP Morgan -- Analyst

No, I was going to thank you for that, but please continue.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Sure. I think the question was around government programs and whether that would catalyze increased competition from the banks. And I think just similar comment is no. I think the banks are obviously very busy managing their existing exposures the same way that we and others are and then obviously, busy through policy mandate, executing on the government loan programs, but we don't expect their participation in those programs to somehow change their competitive positioning relative to us.

Ken Worthington -- JP Morgan -- Analyst

Okay. Makes sense. And then in the deck, assets and incentive generating AUM fell for obvious reasons. What sort of returns do you need on the credit side for those assets to fall back into that incentive generating territory? Is it it could be a basis point, it could be 10%? Is there a a more narrow range that we could see a lot of those assets return back to incentive generating?

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

So on the assets that declined in credit or fell out of incentive generating, most of that were consisted of pretty much separate accounts or more of the strategic separate accounts. That are, for lack of a better term, earlier in their life cycle. So these are all accounts that are still deploying capital. So while they fell below their pref returns, they're not far underneath them. And again, as they're also deploying capital, and they're all European style waterfall, we don't think it changes the overall outlook for those. We think it's a bit of a function, especially again when you think about IRR math, earlier days of funds, it's a little more volatile to cash activity and valuations.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

I would say, Ken, as a general rule, just and it depends on the strategy, it's probably somewhere between 2.5% and 4% on the high end in terms of math build. So to Mike's point, if you wanted to put a number behind it, it's very, very low single digit.

Ken Worthington -- JP Morgan -- Analyst

Great, thank you for the color.

Operator

Our next question will come from Mike Carrier with Bank of America. Please go ahead.

Dean Stephan -- Bank of America -- Analyst

This is Dean Stephan on for Mike Carrier. And just in terms of portfolio companies and investments, can you just provide an update on maybe your energy exposure and other sectors, most impacted such as travel and leisure, maybe what you guys are doing to support these companies and any other areas of the portfolio you actually view as more defensive in this type of environment?

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Sure. You have to we kind of look at AUM across the entire platform, as we talked about firmwide AUM. It's kind of the best way that we can think about exposures and are waiting. In terms of retail exposures broadly about 1.5%, 1.7% of the firm's AUM is invested in some part of the retail landscape. Travel and leisure, broadly speaking, which includes things like gaming and it may include some aerospace, it's probably an inflated representation because they're not all directly impacted, it's about 3.5% of our AUM. And energy is in and around 3%. But of that only about 1% is actually in oil and gas exploration with the remainder being in renewable energy and midstream infrastructure. So I'll leave it to you to decide how you want to differentiate between kind of the upstream and midstream. But if you were to look at those exposures relative to public indices, they're meaningfully underweight. And when you look at those exposures relative to any specific funds, they're underweight as well. So as an example, in our real estate business, we have no hotel exposure in any of our significant real estate funds. In fact, we've actually sold a big portfolio of hotel investments over the last 18 months. So I think it's hard to be completely uninvested in these parts of the market. But we are underweight and where we are invested, it's pretty well distributed across the platform. So it's not going to impact any single fund.

Dean Stephan -- Bank of America -- Analyst

Okay, great. That's helpful. And then just as a follow-up, given the active deployment in the quarter, can you just touch on maybe in a little more detailed areas of the market where you're seeing the most attractive opportunities? And then if and how those opportunities are evolving, kind of given the recent market rally?

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Sure. And we've got a bunch of our senior PMs on the line, so I may ask them to provide a little bit of color. But going back to the framework of the different phases, we're obviously quite busy in the first phase in the liquid markets before the stimulus came and provided a backdrop of support. So when you look at our deployment through March, it was largely buying assets in the secondary markets as we're now transitioning into Phase 2, we pivoted into the private markets. And as we said in the prepared remarks, the bulk of what we're doing there is providing rescue capital to companies that need a liquidity bridge or want to buy "insurance" to play offense in this market similar to the way that we thought about running our own company. But maybe just to give it a little bit of color, I'll ask Scott Graves, who runs our Special Ops business and then maybe Joel, on Alternative Credit, just to get a little bit of a flavor for how they're playing it because I think it will help you better understand where the opportunities are.

Scott Graves -- Partner, Co-Head of Private Equity Group and Head of Special Opportunities

Sure. Thanks, Mike. This is Scott Graves. We look at the world on a relative value basis across Ares and compare what we can achieve in the public market versus the opportunities available in the private market. And to give a little bit of color to what Mike said, March traded down faster than any cycle that we've seen or invested in, it traded down faster than '08, it traded down faster than '01, it traded down faster than the early 90s cycle. It was on pace with the great depression of 2019 late 1920s and beginning of the 30s. That shock in the market presented terrific opportunities, significant liquidity, significant opportunity to buy marketable securities what we thought were very attractive prices generally focused on the top of the capital structure. Through the stimulus plans that came the week of March 23 and right around April 9, we have seen a bounce in the public markets. And certainly, with the view toward almost 2,000 portfolio companies at Ares, it feels like the opportunity set in the public markets has been muted. And we are shifting to the private market. What's different about this cycle is that this is going to be a liquidity driven cycle. Companies are seeing a significant shock to both their revenue line as well as their cost structure, and they will need access to incremental forms of capital in order to get through and the strongest companies and the attractive companies we're focusing on will also find ways to put capital to work to play offense, take share consolidate, make high-returning return on invested capital based decisions. And that's where we are focused. Our backlog of private opportunities across the firm is as rich as it's ever been. And we really look forward to partnering with companies and management teams to provide them capital to get through this troubling time and to also strengthen their business as they think about how to improve coming out of the back end.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Yes, Scott, it's Mike. I think it's a good point, maybe just about the sourcing because we mentioned in the prepared remarks. But having an embedded portfolio of close to 2,000 companies, putting aside the number of marketable securities that we track puts us in a unique position to offer these types of solutions. Either into the existing portfolio or into companies that we have diligence before, but not invest in. So it does allow us to pivot very quickly into the private markets like a few people can. Joel, do you want to maybe, Joel, quickly on the alternative credit side, which I think is probably where we're seeing some of the most acute liquidity shocks, just a quick overview of some of the things that we're focusing on there.

Joel Holsinger -- Partner, Portfolio Manager and Co-Head of Alternative Credit

Sure. Thanks, Mike. This is Joel Holsinger. Yes. I think it was small windows across alternative credit in the liquid markets. And if you think of what we do in alternative credit, it's a lot of pools of loans, receivables and underlying leases and we do lending on the basic as well as rescue as well as asset opportunities and then the liquid markets. And what we're seeing similar to what Scott saw was there was short windows where there was opportunities to buy stuff in the secondary market in the liquid. But where we're seeing the biggest opportunity are for lack of a better term, semi-liquid opportunities. There are opportunities. They're created by the liquidity shock from mark-to-market and repo financing, where with the downdraft of three or four weeks ago, it created a lot of longer-lasting pain across both other credit type ons as well as some of the mortgage REITs you've seen in the news. And so we've been very active in those opportunities. And what you'll see is the opportunities we're seeing there are large.

So there's a short list of people that they can go to, to be able to solve some of their issues. And we just closed on a deal a couple of weeks ago. That was $350 million that was effectively taking out a mark-to-market repo financing where they had advanced at a much higher advance rate and a very low-cost of capital, 2%, 3% cost of capital to something from our standpoint, where we brought them a private solution, and we're 15% to 20% type IRRs, but on a more term, permanent type basis. And I think it's reflective of the opportunity set where you have to have the ability and the power of the platform to be able to do size and bring a solution to the table. So they're still directly sourced and bilateral type transactions, but a lot of it is coming out of the pain that's occurring from the swift downturn of the liquidity of the liquid markets.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Thanks, Joe. Dean, probably more maybe more color than you bargained for, but I always think it helps bring the opportunity to life. So thanks, guys.

Operator

Our next call question will come from Craig Siegenthaler with Credit Suisse. Please go ahead.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thanks for taking my question. I have a 2-parter on fee-related earnings. First, the CLO subordinated fees, can you explain how they're calculated and what could trigger Ares to defer these fees like we saw from Carlyle in the first quarter? And the second part, can you remind us how ARCC or BDC calculates its incentive fees, part ones? And what could cause these fees to be deferred, two?

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

Sure. I'll start with the first part of that, Craig, how you're well. On the CLOs, the sub fees, if you think about a CLO waterfall, you have really, there's two fee components on the recurring management fees. There's a senior fee, which literally sits at top and is actually senior to the AAA bonds. And then you have a subordinate fee, which depending on the deal is somewhere closer to the bottom. Our deals are structured similar but a little different, a little more conservative than others in the market in so much as our blend of fees is approximately 50-50 between senior fees and the sub fees and CLOs. So a higher percentage of our CLO management fees comes from the senior fees than you usually expect used to seeing. And second, our sub fees, for I'd say, almost 3/4 of our deals are usually senior to at least one of the OC tests or an interest diversion test. As far as what it means from an FRE perspective, maybe just kind of compartmentalize is the size of it to us. CLO sub fees, again, represent about half our fees from CLOs. And that amount was, I think, about maybe just over 3% this quarter, call it, 3.3%. So around just over $9 million. So when we think about diversion risk, as we ended the quarter, all of our CLOs were passing all their OC tests. Again, I'm not we don't want to comment on other managers.

I think CLOs are different as far as structure to some extent. And how they're managed are different. Some CLOs are managed, ROE two rating and picking the highest return points within rating spectrums. Whereas we, similar to everything else we do at Ares, have a very fundamental credit focused approach to the portfolio, the CLOs. And I think that enables them to be more conservatively positioned. But if I were to think about kind of a draconian scenario where some CLOs were to start failing OC tests based on what we saw on the financial crisis and how you stressed it, I think you could see maybe again, kind of more of a dire scenario, say, up to half the deals failing for one to two quarters, which, for us, you think about has been, one, I think that's probably worse than you saw during the great financial crisis of '08, '09. But for us, it would be an impact on management fees, that's for all practical purposes de-minimis. So I feel pretty good again about the CLO book, most notably because of the split and just the overall size of it. The last thing probably to highlight, and this is a little different than some of the commentary you just heard is when you compare CLOs to the last time around, in the last great financial crisis, back then about 50% of the syndicated loans going into it were owned by CLOs, and about the other half, were owned by other parties, and a lot of it was heavily owned on swap. This time around, about 3/4 of syndicated loans are held by CLOs. So you have less, what we would call for selling. I think the downward pressure on prices, even if downgrades continue, the bottom probably won't be as deep as it was that time around. On ARCC, the admin credit on the Part one fee, I think, is what you're referring to. And I apologize, remind me of what you were trying to find out there?

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

I can take it, Mike. I think it was just about the structure of the ARCC part I fee. And the deferral mechanism. And I think it's important to at least separate the two because there are two separate calculations around earning and deferring. And I think it's important that we differentiate between the fee getting earned and the fee getting paid. So the way that the Part one fee works is it's calculated quarterly against the 7% hurdle pre-incentive fee, and then we compare that to the extent that it's above the 7% hurdle for the quarter, we get a 20% Part one incentive fee. So by way of reference, this quarter, it was about 9% against the 7%. There is also a kind of a nuanced deferral mechanism, which, frankly, we inherited when the BDC went public in 2004, that is designed, I think, to theoretically protect liquidity in that portfolio to the extent that you are seeing credit deterioration and income deterioration. And basically, what does is to the extent that it is earned, it then looks at your return of payments to shareholders and NAV as to whether or not to pay it.

And so there could be situations, and we saw this in 2009, where even though the book is performing and paying cash interest, and therefore, able to support the payment of the incentive fee and the payment of the dividend it traps the fee, but the fee is earned and then gets paid out at a later date. And what's unique about the calculation is it's a four quarter look back, and then it resets on the new NAV. So basically, what happens is if you were to track that fee, it would likely pay out starting a year later when you were in that new NAV hurdle. So if you look at our history, the Part one incentive fee has been earned every quarter since ARCC went public. And then the deferral mechanism, obviously, is just a function of unrealized losses, which either come back or resets your NAV and then at pace. So I don't know if that was too complicated or not, Craig, but it's a little bit of a nuanced.

Just to reiterate, Craig, sorry. I think you saw ARCC announced earnings yesterday. And obviously, we're not in a deferral situation. Sorry, operator.

Operator

Now our next question will come from Gerry O'Hara with Jefferies. Please go ahead.

Gerry O'Hara -- Jefferies -- Analyst

Okay. Thanks for taking my questions. Okay. So actually, similar questions as a follow-up, I think to Ken's question earlier with respect to incentive generation required for eligibility. I think his question was credit. I'm not sure if the private equity side was touched on, but perhaps if you could comment on that, that would be helpful?

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

Sure. The funds that I think fell out of incentive generating this quarter were there was only three, what I would call our flagship funds across all of our businesses; two in private equity, one in real estate. And all three of those funds are funds still in their investment periods. So they fell below the pref returns. But again, where they were in their life cycle. They weren't funds, I would call, in carry harvesting mode. And if you look at where our accrued carry was at year-end and is today, it's mostly concentrated in funds that are still generating and past their investment periods, with most of those being in both private equity and real estate.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Gerry, I think I want to reiterate what Mike talked about in the prepared remarks just for a second, which is obviously, incentive-related earnings are an important part of our business model, but it's not the predominant part of our business model. And as we've talked about on prior calls, we switched to a capital management plan where we were pegging our dividend to our FRE and using our performance-related earnings to effectively retain earnings compounded a low tax rate and invest back into the core earnings engine. And so I think it's important to contextualize those types of moves against the framework of how we manage the P&L and the balance sheet. And so were you to look at the net accrued carry while we were not immune to the downdraft we basically saw it go from $340 million to $235 million. But what that's not accounting for is the wave of new funds that sit behind it that will obviously replenish and continue to grow that. So I think it's worth paying attention to it, but I just want to remind everybody that it's not actually a significant driver of the profit picture at Ares or doesn't factor into the support of the dividend.

Gerry O'Hara -- Jefferies -- Analyst

Okay. That's a helpful reminder. And this is perhaps a broader question, but Ares managed its business very well through the financial crisis. Are there any are there sort of one or two, I guess, lessons, if you will, from that time period or perhaps actually better stated changes that were made to the investment process that have really shown through or shown to be advantageous as we've kind of moved into and wherever we are in the stage of this current crisis?

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

I'll say a couple of things, and we talked about it in the prepared remarks, but each crisis is different, but the crisis response tends to be similar, if not familiar. And I think the good news is this senior management team has been together a long time and navigated all the crises. And so there's a lot of institutional muscle memory and a lot of learning. I think what's unique about this one is it is very heavily it's a liquidity driven crisis. And so I think now more than ever, we are focused on liquidity. Whether that's liquidity, at Ares, liquidity within our funds and liquidity within the portfolio companies. And I think people who mismanaged their liquidity position going into this are feeling the pain and those that are not taking the liquidity shortfall seriously enough and allowing for an extended period of dislocation, I think, are also going to suffer. So maybe differently here, we're being a little bit more judicious in terms of how we're thinking about liquidity and how we're investing.

And then I think the big lesson learned is you can never time the bottom, so you have to be investing through the crisis, and that's why these phases, even though they're uncertain in terms of how long they're going to be and whether or not we get to test the lows that we saw in March in the future is unclear, but you have to be investing all along the way to make sure that you're capturing the opportunity. So I think what you'll see from us, which is what you've seen from us before, is we're going to be measured in our deployment at each of these phases. And obviously, how we access the market is going to change depending on the phase that we're in. But we're also a much larger, much broader, much more diversified company than we were 12 years ago. And I think that, that serves us well. We just have more data points, more information more talented people, more access to capital. And so we did very well in '08 and '09 and subsequent years. But when you look at where we're positioned now, and where our funds are positioned relative to where we were then. We're obviously just in a much better place.

Gerry O'Hara -- Jefferies -- Analyst

Great, thanks for taking my questions.

Operator

Now our next question will come from Chris Harris with Wells Fargo. Please go ahead.

Chris Harris -- Wells Fargo -- Analyst

Yeah, thanks. So piling on to that last question there. One of the things that seems a bit different in this recession is the severe impact on small and midsized businesses versus maybe the larger ones that have perhaps more excess to capital. And Ares is core focus being the middle market, that's creating really good investment opportunities for you, but at the same time, could present some elevated risks, so how should we be thinking about the risk of being a middle market investor and lender in this environment?

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

Yes. I'll give you my two cents and then Kipp or others if you want to pile on, feel free. But we've been trying over the last couple of years to help people understand the value of being senior secured lender at the top of the balance sheet in a controlled position. Versus the risks of being an equity owner below. So we would agree, one of the challenges today is a lot of the money that has found its way, at least into the healing of the markets is going to companies that frankly don't need it, and the small business and consumer probably still liquidity-challenged and feeling the strain. But if you look at our middle market lending books, they are predominantly senior secured. They are predominantly in situations where we are the control lender.

They are predominantly in situations where there is a large, well-capitalized institutional equity owner below us and maybe echoing what I just talked about in terms of how we're positioned the size and quality of the companies that we're lending to on our private credit books is just much different than it was 12 years ago in terms of the institutional quality and franchise nature of those businesses. So as Kipp and the team talked about on ARCC's call, and you can see it in the credit metrics, there's obviously a modest tick up, but we had almost 100%, I think it was 100% payment or close to it in the quarter. Slight tick up in non-accruals, and I think that's a function of the quality of the underlying book, but also the fact that they're we're facing off against institutional equity owners, which is, in and of itself, a risk mitigant. So as long as you're going into it liquid and as long as you have the capability to actually own a company to the extent that you need to foreclose on it through the senior loan, and I actually think there's money to be made. And when all is said and done, this will wind up having been an equity issue more than it is a credit issue, at least for for a well underwritten book, like I think we have.

Operator

Our next question will come from Alex Blostein with Goldman Sachs. Please go ahead.

Alex Blostein -- Goldman Sachs -- Analyst

Great. Hi. Thanks for taking the question. Thanks for all the color as well. Great. Well, I wanted to ask you guys around some of the strategic M&A priorities. I think Mike, both Mikes actually, I think, highlighted that in your prepared remarks with respect to flexibility on the balance sheet, and obviously, the historically more acquisitive nature of some of the growth initiatives you guys put into place. So anything in particular comes to mind either in some of the more dislocated areas for kind of corporate M&A or accelerating some of the initiatives that you've been trying to build, whether it's real estate or other things? Some color there would be helpful.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Sure. So we've been pretty explicit on prior calls as to where we're focusing. And obviously, they were insurance, Asia and real assets. And obviously, you're seeing us execute well against that strategic framework with SSG, the SMBC tie-up and the continued development of these Aspida platform. So obviously, we'll continue to use our balance sheet to advance those initiatives. Real estate, infrastructure and real assets broadly defined, continues to be a big focus for us. It is becoming a bigger focus because telling you something that you probably know, real estate is there's just a significant amount of distress and transformational change happening in the real estate markets as a result of the health and economic crisis. And so we would expect through M&A and new product development to be able to actually accelerate the growth of our real estate business organically and inorganically coming out of this crisis. And so it's always been a priority, but I actually think it's probably moved up the list a little bit just given the size of the opportunity set. The other thing I would highlight, we've talked about this, a lot of what we use the balance sheet for is not just strategic M&A, but strategic product development and joint ventures. And so in a market like this, using the balance sheet to acquire assets and teams and then reposition those assets and teams into new business lines is something that we have a lot of experience doing. And we're already having some pretty interesting conversations on some new product development where we can modestly use the balance sheet to launch a new product that sits adjacent to something that we already do. And so I would expect that we'll be doing a fair amount of that over the next couple of quarters as well.

Alex Blostein -- Goldman Sachs -- Analyst

Great, thanks so much.

Operator

Our next question will come from Kenneth Lee with RBC Capital Markets. Please go ahead.

Kenneth Lee -- RBC Capital Markets -- Analyst

With RBC Capital Markets Just wondering if you could help us frame the relative strength of the liquidity position of the firm, talk about any liquidity needs or perhaps any kind of unfunded commitments in the near term?

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Mike, do you want to take that one?

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

Yes, happy to. Ken, I think we talked about in our prepared remarks, clearly, the balance sheet is flushed with cash, that combined with undrawn access on a revolver $1.4 billion plus of liquidity. So I feel great about our liquidity position. We have no mark-to-market leverage, which I highlighted, which is important. Because there's no exposed flank where we have to worry about funding margin calls or similar types of repayments under. We have no near-term debt maturities. You probably would have seen we amended each year, we usually roll our revolver, so our corporate credit facility is now through 2025. So I think from a and from a full balance sheet standpoint, we're years out from our next bond maturity and have a lot of capital. So I think we feel really, really good about that. As far as commitments, we do have GP commitments to our funds. A fairly decent amount of those are held by our employees that invest side-by-side with Ares Management in our funds. We clearly have to settle the closing of SSG, which we had previously disclosed was primarily stock. And Aspida, closed on that transaction of Pavonia where we had previously described the amounts. Outside of that, there's no other real, what I would call, contractual liquidity requirement. It's going to be really more about we've access to our a lot of capital for opportunities.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Yes. And just to frame that, Ken, I actually think if you looked at, to Mike's point, the balance sheet light model has actually gotten lighter over time as the employees are taking up more and more of the GP commitments. But if you aggregated future funding potential in our existing investment book. I think it's about $400 million, which obviously doesn't get deployed quickly...

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

Over the next many years across our funds.

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Yes. So if you were to try to think about the demands on the balance sheet from the actual book of GP investments, it's actually quite small.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great, very helpful. That's all I have. Thank you very much and hope everyone stays safe thank you.

Operator

And now our final question will come from Michael Cyprus with Morgan Stanley. Please go ahead.

Michael Cyprus -- Morgan Stanley -- Analyst

Hey, thanks for squeezing me in here. Just a question on the direct lending opportunity set. Just hoping you could elaborate a little bit more there in direct lending, which has been largely sponsor-financed, I think, for you guys, like 80-20. Just how your direct lending funds are adapting against an evolving opportunity set that's not seeing as much LBO activity? How much of the deployment would you say is focused on existing portfolio companies versus making newer investments? And maybe you could talk about how you're sourcing some of those newer investments?

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

Sure. So you're right. New buyout activity is somewhat muted, although it is happening. So we're closing new transactions in both Europe and the U.S., particularly in industries that are obviously not affected by COVID. So there is a segment of the economy that can be underwritten around technology and certain segments of the healthcare landscape, et cetera. So there is stuff to do there, but it is slower. There is an opportunity, as we mentioned, and I think it will accelerate to provide capital into our existing books. I thought it was interesting on the ARCC call yesterday. Mitch talked about capital deployment into the existing portfolio that was about 14.7% return against an 8% return on loans that came out of the book. That was a pretty good indicator of the type of return opportunity that we're seeing, bringing capital into that portfolio. And about 50% of the deployment in the quarter, I think, went to existing borrowers. So where the direct lending teams are spending most of their time is reunderwriting the existing book using their capital to invest to support those companies, but where they're making investments?

Tightening up documents, deleveraging through equity infusion below us, increasing spreads, fees and all of that. So there's a reunderwriting, but then there's also kind of a rerating of the book, which you should see come through in higher returns on the embedded loans. Second thing we're doing is in partnership with the alternative credit group and the opportunities funds is leveraging the combined platform on the rescue lending side, and that's been very, very fruitful. There is opportunity for us to provide liquidity into certain companies that have incremental baskets, allow them to actually bring new capital into companies without reopening box that's been pretty fruitful for us. So it's actually been quite active. And then needless to say, all of our direct lending funds have the ability to actively invest in the secondary market as well. And as you would expect, there is a very long list of names that we are tracking actively as potential secondary opportunities. We would expect that as this volatility extends that, as we've done in the past, we'll start seeing portfolios and single assets actually coming back to us as a secondary opportunity as well.

Kipp deVeer -- Director, Partner, Head of Credit Group

Mike, I'll just jump in. It's Kipp deVeer. I'll just say, I think as this extends as a key point, we're going to emerge much stronger. I mean, we definitely see competition in the space significantly weakened for the most part. We see a lot of competition that's having difficulty dealing with outstanding commitments, providing liquidity to existing portfolio companies. And when the concept of a new deal comes forward, it's kind of a non-starter. We're in exactly the opposite position and that we've deployed in the U.S. and Europe north of $2 billion since March one and a lot of the opportunity sets that Mike outlined. So we're very much in business for new deals, although, there are fewer of them, and there are a lot of other things to do in the current environment that are pretty exciting.

Operator

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 June 12, 2020, and by dialing (877) 344-7529 and to international callers by dialing one (412) 317-0088. For all replays, please reference conference number 10140271. An archived replay will also be available on a webcast link located on the homepage of the Investor Relations section of our website.

Duration: 82 minutes

Call participants:

Carl G. Drake -- Partner, Head of Public Investor Relations and Communications

Michael J. Arougheti -- Director, Co-Founder, Chief Executive Officer and President

Michael Robert McFerran -- Partner, Chief Financial Officer, Chief Operating Officer

Joel Holsinger -- Partner, Portfolio Manager and Co-Head of Alternative Credit

Scott Graves -- Partner, Co-Head of Private Equity Group and Head of Special Opportunities

Kipp deVeer -- Director, Partner, Head of Credit Group

Robert Lee -- KBW -- Analyst

Ken Worthington -- JP Morgan -- Analyst

Dean Stephan -- Bank of America -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

Gerry O'Hara -- Jefferies -- Analyst

Chris Harris -- Wells Fargo -- Analyst

Alex Blostein -- Goldman Sachs -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Michael Cyprus -- Morgan Stanley -- Analyst

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