雅雷斯管理 (ARES) 2026财年第三季度业绩电话会：资产管理规模达到6910亿美元

核心要点

• 截至 2026 财年第三季度末，Ares Management 资产管理规模达到 6910 亿美元，同比增长 16%；收费资产管理规模为 4160 亿美元，同比增长 13%。
• 公司当季募集毛资本总额超 310 亿美元，并投资部署了 350 亿美元。管理层预计第四季度募资将维持强劲，资金部署力度也将进一步加大。
• 管理费收入近 11 亿美元，同比增长 10%。费率相关收益增至 5.24 亿美元，FRE 利润率扩大 110 个基点至 42.5%。
• 第三季度每股税后已实现收益为 1.26 美元，前九个月为 3.79 美元。前九个月已实现收益同比增长 20% 至 15 亿美元。
• Ares 宣布派发季度股息 每股 1.35 美元，较去年同期增长 20% 以上。
• 管理层维持其 2026 财年 FRE 增长 16% 至 20% 的目标，并预计已实现收益增长将在 20% 至 25% 以上的区间内。

核心财务数据

业务与运营表现

信贷业务仍是主要增长驱动力。尽管第三季度其大型旗舰混投信贷基金系列没有进行 LP 募集交割，但 Ares 仍在开放式机构基金、单独管理账户和财富管理载体中筹集了近 150 亿美元。

最新一期美国优先直接贷机构基金的首次交割获得了超过 80 亿美元的股权认购承诺，相当于合并目标的 80%，较上一期同期的首次交割额高出 60%。管理层表示，算上预期的基金层级杠杆，初始交割代表了约 150 亿美元的可投资资本。

由于并购活动低迷，美国直接贷款的投资部署受到抑制，但管理层表示储备项目规模创下历史新高，并在第四季度初开始转化。欧洲直接贷款、替代信贷和基础设施股权是第三季度投资部署最强劲的领域之一。

信贷投资组合指标保持稳定。利息保障倍数在美国直接贷款中为 2.1 倍，在欧洲直接贷款中为 2.3 倍，而贷款价值比保持在 45% 左右的区间。美国直接贷款的不计息不良贷款率从上一季度的 1.9% 改善至 1.8%。投资组合公司的 EBITDA 同比增长 8% 至 9%。

更高的短期利率有助于支撑信贷收益和公司的盈利能力。截至季度末，信贷部门 83% 的债权资产为浮动利率。管理层指出，利率走高虽然也增加了借款人的利息支出，但表示目前的组合保障倍数和股权缓冲空间依然具有支撑力。

房地产资产管理规模超过 1260 亿美元。第五期日本物流开发基金以 40 亿美元的硬性上限完成募集封顶，规模比上一期高出近 50%。今年迄今，房地产债权策略筹集了近 30 亿美元的 LP 股权承诺，而两家战略房地产合资伙伴在过去两个月中筹集了超过 30 亿美元。

基础设施业务持续扩大规模。过去一年，基础设施总资产管理规模增长了 50% 以上。开放式核心基础设施基金在第三季度获得了约 27 亿美元 的股权承诺，资产管理规模达到约 85 亿美元。基础设施股权策略实现了 3.7% 的季度回报率。

Ares 正将其数字基础设施策略集中于主要市场的数据中心及相关电力资产，并拥有大型超大规模企业交易对手、长期租赁和预租容量的支撑。管理层将实体数据中心、发电和输电描述为到 2030 年约 2 万亿美元的融资机遇，属于业绩会上引用的估计约 5 万亿美元 AI 相关总资本需求的一部分。

二级市场资产管理规模在两年内增长了约 70%。首期全球结构化解决方案基金以 42 亿美元 完成募集，大幅高于初始的 10 亿美元目标。

财富管理业务带来了超过 42 亿美元的股权承诺，创下历史第二高季度表现。财富管理 AUM 达到 820 亿美元，同比增长 41%。

管理层业绩指引

• Ares 预计 2026 财年全年 FRE 增长率为 16% 至 20%，符合其年化目标区间。
• 管理层预计 2026 财年已实现收益增长将在 20% 至 25% 以上的区间内。
• 全年净已实现业绩收入预计为 3 亿至 3.25 亿美元，这意味着 第四季度为 1.6 亿至 1.85 亿美元。预计第四季度金额中约 90% 来自欧式瀑布流结算基金。
• 全年 FRE 利润率的扩大预计将略高于每年 0 至 150 个基点区间的中点。
• 管理层预计，在信贷利差无重大变化且受年末市场价值影响的前提下，第四季度来自信贷 SMA 的毛费率相关业绩收入约为 1.15 亿至 1.25 亿美元。
• 数字基础设施基金推迟首次交割将部分利润率收益递延至 2027 年。管理层预计追赶费和其他基金交割将支持明年的利润率扩大至其指引区间的上半段。
• 公司预计第四季度投资部署将有所加强，包括美国直接贷款的回升，但强调交易时机仍存在不确定性。

风险与关注领域

变现退出环境依然缓慢。管理层表示，还款延迟使部分基金的欧式瀑布流结算推迟了一年或更长时间，从而降低了日历年业绩收入预测的准确度。

高利率有利于浮动利率信贷收益，但会增加借款人的偿债成本。Ares 表示，其投资组合此前已在比当前水平高出约 100 个基点的基准利率环境中运营过，不过未来的信贷表现仍是一个关键考量因素。

随着商业地产资本市场吸收近期的利率调整，短期内可能面临扰动。然而，鉴于新建项目有限和租赁活动强劲，管理层对中期基本面仍保持审慎乐观。

数字基础设施融资正在经历价格发现过程，对交易对手风险的审查更加严格，且可能存在资本挤出效应。Ares 目前避开了更复杂的 GPU 和芯片融资，转而专注于管理层认为更容易进行承销的实体基础设施。

分析师问答要点

美国直接贷款：管理层并不认为较高的利率必然会减少投资部署。管理层提到了私募股权持有公司到期老化、赞助商持有大量未投资金，以及创纪录的直接贷款储备项目。预计交易活动将在第四季度开始转化并延续至 2027 年，尽管具体时机尚不确定。

2027 财年盈利驱动因素：Ares 强调，已募集但尚未收取管理费的资本、投资部署的改善，以及数字基础设施基金潜在的追赶费，都是未来管理费和 FRE 增长的来源。

数字基础设施承销：公司正优先考虑全球主要市场的数据中心，这些项目拥有投资级超大规模企业作为交易对手、12 至 15 年的租约、无解约权并设有通胀调整机制。管理层表示，超过 65% 的数据中心需求与核心计算相关，而非仅仅取决于人工智能。

资产与组合收购：Ares 同意从一家机构投资者手中收购一份 11 亿美元的直接贷款组合。管理层预计未来一至两年将有更多组合重组的机遇，并看到了直接贷款和信贷二级市场的进一步投资部署潜力。

并购策略：管理层表示收购门槛依然很高。潜在的外延式扩张更有可能出现在非信贷业务领域，如基础设施、私募股权和保险，但这取决于估值和人员考量。

信贷利差：管理层表示，直接贷款利差在今年早些时候走阔 50 至 75 个基点后，目前基本持平。法律文本和约束条款依然保持偏紧，而更广泛的资本拥挤仍可能导致投资者要求更高的利差。

业绩电话会议完整文字记录

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完整财报电话会议逐字稿

管理层陈述

Operator

Welcome to Ares Management Corporation's Third Quarter 2026 Earnings Conference Call.

[Operator Instructions]

As a reminder, this conference is being recorded on Thursday, October 29, 2026. I will now turn the call over to Greg Mason, Co-Head of Public Markets, Investor Relations for Ares Management. Please go ahead.

Greg Mason

Good morning, and thank you for joining us today for our third quarter 2026 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 our risk factors in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results, and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in Ares or any Ares Fund.

During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our third quarter earnings presentation available on the Investor Resources section of our website for a reconciliation of these non-GAAP measures with the most directly comparable GAAP measures.

Note that we plan to file our Form 10-Q early next month. This morning, we announced that we declared a quarterly dividend of $1.35 per share on the company's Class A and nonvoting common stock, representing an increase of over 20% over our dividend for the same quarter a year ago. The dividend will be paid on December 31, 2026, to holders of record on December 17. Now I'll turn the call over to Mike, who will start with some comments on the current market environment and our third quarter financial results.

Michael Arougheti

Great. Thank you, Greg, and good morning. I hope everyone is doing well. Our strong third quarter results demonstrate the breadth and increasing diversification of our global platform. While transaction activity was uneven across many of our markets, our leadership and scale enabled us to actively invest $35 billion across a growing array of strategies and geographic markets while maintaining our highly selective investment approach. Institutional investor appetite for our strategies remains as strong as ever and is broadening across sectors and regions. During the third quarter, we once again raised over $31 billion of gross capital. We have visibility on another strong fourth quarter, setting us up for another record year in fundraising.

We ended the quarter with $691 billion of AUM and $416 billion of fee-paying AUM, representing year-over-year growth of 16% and 13%, respectively. Importantly, our core earnings metrics continue to grow within our long-term target ranges, and we remain on pace to meet our financial goals for the year. This quarter's results also underscore the expansion of our investment activities, which are increasingly more diversified, resulting from our organic and inorganic growth initiatives.

We have scaled several strategies that position us to maintain strong fundraising, deployment and fee growth through volatile markets. And because many of our businesses provide complementary exposure to various markets, different parts of capital structures and varying sources of investment supply, we have more strategic paths for growth and greater flexibility to invest where the relative value opportunity is most attractive.

During the third quarter, for example, our most active areas of net deployment were European direct lending alternative credit and infrastructure equity, which are all benefiting from attractive market dynamics and increasing demand for our scaled capital solutions.

Looking to the fourth quarter, we believe these businesses have the momentum to continue delivering strong results while we expect a pickup in activity in our U.S. direct lending business. From a longer-term perspective, our growth outlook is a function of our ability to originate and manage differentiated investment opportunities in the vast and growing private markets in which we operate across the globe.

We believe that our addressable markets across private credit, real assets and secondaries are in the tens of trillions of dollars. And despite our leading positions in these growing markets, we still have significant upside through further penetration across these markets.

Our portfolios also have significant embedded growth opportunities as our underlying companies and asset owners seek additional financing opportunities to support their continuing growth. You can see these dynamics driving growth across each of our businesses. In credit, we've built leading market positions in nearly every private credit strategy we operate where scale, relationships, sourcing and structuring capabilities drive outperformance. And we manage a leading liquid credit business with established track records of outperformance. We continue to believe that this collaboration enables us to identify the best real-time relative value for our investors across the private credit, bank loan and high-yield markets.

It also serves to hedge deployment and profitability in markets where the loan and high-yield markets are more competitive with the upper end of the private credit markets. In real estate, we are one of the largest managers globally with over $126 billion of AUM. We're seeing the benefits of our vertically integrated capabilities and meaningful geographic scale across North America, Europe and Asia.

In secondaries, AUM has grown approximately 70% over the past 2 years as we've expanded across private equity, real estate, infrastructure and credit solutions. We've raised several of the largest institutional and wealth funds in these strategies, and we are rapidly scaling and expanding our fund families. The more recent growth of our infrastructure platform is another important example of the combination of TAM expansion and platform breadth. Our total infrastructure AUM has increased more than 50% over the past year. Our core value-add and vertically integrated development and operating capabilities along with significant debt and equity capital, reinforces our positioning to invest across assets and their capital structures in the current digital and power infrastructure CapEx super cycle.

We have meaningful capabilities across power generation, including as a top 10 owner of renewable assets in the U.S. as of mid-October as well as data centers, power transmission and traditional transportation infrastructure like highways and rail. In addition to these longer-term structural trends, the shift in the outlook for higher short-term interest rates is generally constructive for our credit business and firm profitability.

At quarter end, 83% of the debt assets in our credit group are floating rate and higher base rates translate to higher returns for our credit funds, all else equal. That increase in income can be meaningful for our credit fund investors because they received the benefit of higher base rates without having to take additional risk by moving down the capital structure. Historically, this has also supported fundraising demand for our credit products as investors look to capture attractive floating rate income. We saw this during the period of elevated rates from the middle of 2022 through the end of 2023. During that period, our credit group AUM increased at an annualized rate of approximately 21%. While we wouldn't assume the same outcome in every rate cycle, history has shown that a higher rate environment can create both stronger current returns for existing credit investors and incremental demand for long-term exposure to the asset class.

Of course, higher rates increased interest expense for borrowers, but we believe that our portfolios are in a strong position today with interest coverage in our U.S. and European direct lending portfolios at the end of the third quarter of 2.1x and 2.3x, respectively and nonaccrual rates are stable and well below historical industry averages.

Combined with loan-to-value ratios that remain near start lows, meaningful equity cushions and the larger average size of the companies that we finance, we believe the portfolios remain well positioned.

Turning to fundraising. An illustration of the strong ongoing institutional demand that we're seeing this quarter came within credit. While we had no LP closings in any of our large flagship commingled credit fund families during the quarter, we still raised nearly $15 billion of total capital across open-ended institutional funds separately managed accounts and wealth vehicles. This activity represents nearly half of the total gross capital that we raised in the quarter and our ability to raise this level of capital without a major commingled fund closing demonstrates how broad our franchise has become.

In another sign of strong institutional demand for our private credit funds, last week, we held the first close for our latest U.S. senior direct lending institutional funds totaling over $8 billion of equity commitments. As previously announced, we launched our fourth closed-end U.S. senior direct lending fund and first institutional open-ended core product just 6 months ago. The combined first close of these 2 funds already represents 80% of our target and is 60% greater than the prior vintages first close. Including anticipated fund level leverage, which will close over time in the coming quarters, fundraising for these initial closings collectively represents approximately $15 billion of total investable capital. We expect additional closes this year with the fundraising continuing for the first half of 2027.

In European Direct Lending, we expect to launch our seventh institutional fund in the first half of 2027. Consistent with our recent fundraises involving our Pathfinder and U.S. senior direct lending series, we expect to offer investors both an open-end and closed-end fund option. In real estate, we completed the final close of our fifth Japan Logistics Development Fund, JDP 5, had its $4 billion hard cap after an oversubscribed fundraise. This fund represented the first vintage of a legacy GCP fund that we launched on the Ares platform. The fundraise was completed in only 12 months and was nearly 50% larger than the predecessor fund, representing our largest closed-end real estate fund raise to date.

The fund included strong support from existing investors as well as a significant number of investors making their first commitment to the JDP series with our new U.S. dollar sleeve representing more than 20% of the capital raised. We believe this demonstrates the benefits of combining a strong local market investing track record with the scale and distribution of the broader Ares platform. The fund is off to a strong start with 6 new projects underway and a robust pipeline of opportunities across Japan. We recently launched our fifth U.S. opportunistic real estate equity fund, and we believe that there will be significant demand for the fund given the strong track record of our previous opportunistic real estate equity funds.

Our real estate debt platform has also generated robust fundraising momentum with nearly $3 billion of LP equity commitments raised year-to-date from global institutional investors, marking the strongest fundraising since this platform's inception. We continue to see strong capital appetite around our real estate credit strategies and have a robust fundraising pipeline. Outside of our commingled funds, we're benefiting from major strategic relationships with some of the largest global real estate investors where our partners see the value of our vertically integrated development platform.

In just the past 2 months, we have raised over $3 billion from 2 such strategic partnerships. Within infrastructure, we continue to see strong demand across both debt and equity strategies. In infrastructure debt, we expect to hold a final close for our latest commingled vintage in early November above the fund's $6 billion target.

In infrastructure equity, we raised approximately $2.7 billion of equity commitments in the third quarter in our open-ended core infrastructure fund, the largest quarterly fundraising amount in the wealth channel for any Ares Fund. We also expect to launch the third vintage of our institutional value-add infrastructure equity strategy in the first quarter of next year. Investor interest in our global digital infrastructure equity strategy also remains very strong, and we expect to hold a meaningful first close for the fund in the fourth quarter.

The strategy is benefiting from the significant secular demand for computing capacity and power, but our approach remains highly selective. We are focused on core major global markets like Tokyo, London, Northern Virginia, Atlanta and Amsterdam and developing capacity that is designed to support the growth of both cloud use cases as well as AI inference with strong hyperscaler counterparties and long-term leases. Taken together, we expect these various fundraises will provide us with substantial capital to invest against the significant opportunities that we're seeing across the infrastructure landscape.

Secondaries is another area where fundraising momentum continues to build. Our inaugural Global Structured Solutions fund held its final close at $4.2 billion of total capital significantly exceeding its initial $1 billion target. We believe that this result further strengthens our position in the growing GP solutions market, which is seeking flexible capital to support a range of strategic objectives including increasing GP fund commitments, seeding new strategies with structured LP commitments and facilitating succession plans.

Following the tremendous success of our third infrastructure secondary strategy, which increased its hard cap and raised over $5 billion. We're launching an infrastructure fund that focuses solely on GP-led transactions based upon our strong track record in the segment. Finally, our tenth real estate secondaries fund is expected to complete its first close by year-end at more than 50% of its initial $2.5 billion target as persistent interest rate volatility and limited DPI and continue to provide meaningful opportunities for real estate LP and GP investments.

Within Wealth Management, third quarter total equity commitments increased to more than $4.2 billion, making it our second best quarter on record bringing total [indiscernible] AUM to $82 billion, up 41% year-over-year. In addition to a record fundraising quarter for our core infrastructure fund, real estate fundraising continued to trend positively with nearly $600 million raised through common stock issuance and exchanges, while our credit funds raised nearly $700 million combined. Our continued strength in the wealth channel is supported in part by the breadth of our suite of Evergreen solutions across all major private market asset classes. We continue to believe the long-term wealth opportunity is significant and underpenetrated and our diversified product lineup allows us to respond to changing investor demand rather than relying on any single asset class to drive growth.

Including a similar amount that we expect to raise in the fourth quarter, full year gross equity inflows are anticipated to be roughly in line with the $16 billion that we raised last year. This consistent fundraising performance stands in contrast to the declines that we've seen across the industry this year.

Looking forward to next year, we anticipate further growth in flows driven by expanded distribution partnerships, broader access to our 8 flagship strategies for international investors and a rebound in flows into [indiscernible] supported by strong fund performance, core earnings in excess of its dividend and the potential for higher base rates to further enhance dividend coverage, all else equal.

Our newest strategies, core infrastructure and sports media and entertainment are seeing strong market support. We're continuing to work on interval fund solutions, which have the potential to expand market access to our investment capabilities across channels. And these solutions will focus on the defined contribution market, model portfolios and the mass affluent investor segment.

And let me finish with more detail about our investment activities. We invested $35 billion across the firm during the quarter with strength in European direct lending, alternative credit, real estate and infrastructure. U.S. direct lending was slower due to more muted M&A activity. However, we have already seen several transactions closed early in the quarter, and our pipeline remains at record levels. So we expect a more balanced deployment mix in the fourth quarter as U.S. direct lending activity ramps up. We're entering what has historically been a seasonally strong period with record available capital and current pipelines point to healthy activity across each of our major credit strategies.

We continue to maintain a high degree of investment selectivity and we're using our scale and relationships to develop creative solutions for our investors and counterparties. As an example, at the end of September, we signed an agreement to purchase a $1.1 billion direct lending portfolio from an institutional investor and the transaction will close throughout the fourth quarter. And earlier this week, Ares Capital Corporation announced the acquisition of MidCap Financial Investment Corporation, which is expected to close in the first half of 2027, subject to customary conditions, including the approval of [indiscernible] stockholders.

We believe that this transaction will be a very positive outcome for ARCC, [indiscernible] and Ares Management shareholders. And with that, I'll now turn the call over to Jarrod to provide additional details on our financial results. Jarrod?

Jarrod Phillips

Thank you, Mike. Good morning, everyone. Our third quarter results reflect continued growth in our key earnings metrics and the increasing scale and diversification of our platform. We continue to benefit from a large base of long-duration capital, broad-based fundraising, significant available capital and a management fee-centric earnings model. These characteristics provide strong visibility into future fee-paying AUM and management fee growth even when deployment and realizations vary from quarter-to-quarter. Turning to our results. Management fees were nearly $1.1 billion for the quarter, increasing 10% compared to the prior year period. The growth was supported by higher fee-paying AUM from deployment across European direct lending and alternative credit, continued capital formation in our perpetual vehicles and growth across our real assets businesses. Part 1 fees within management fees totaled $169 million, up 21% from the prior year period. For the first 9 months management fees, FRPR and other fees increased 16% versus the prior year-to-date period. We continue to expect to see greater contributions from FRPR and other fees in the coming years as we scale not only our perpetual strategies, but also our capital solutions activities and certain real estate development funds.

Fee-related performance revenues this quarter were $79 million, primarily generated by our open-ended core alternative credit fund with additional contributions from our Japanese open and industrial real estate equity fund. As we've discussed in prior quarters, the timing of these revenues varies by fund and strategy. So quarterly comparisons can be uneven even when the underlying incentive eligible asset base is growing. In the fourth quarter, we expect to receive gross fee-related performance revenues of approximately $115 million to $125 million in gross FRPR from credit SMAs, which assumes no significant changes in credit spreads but remains subject to changes in market values through year-end.

In real estate, our 2 non-traded REITs have collectively accrued $51 million as of September 30 in gross FRPR, and this amount is subject to change based on market conditions. And secondaries, following the exceptionally strong performance of APMF in the second quarter, Q3 performance left a small high watermark to overcome in Q4, but we're on track, subject to market conditions to generate FRPR in the fourth quarter.

Turning to expenses. The most notable change was in G&A expenses. While the expenses were flat quarter-over-quarter, we saw the onetime second quarter expenses related to our annual investor conference, mostly offset by an increase of $8 million from higher distribution expenses primarily related to the increased inflows in our open-ended core infrastructure fund from a large distribution platform.

Fee-related earnings were $524 million and FRE margin was 42.5% for the quarter compared to 41.4% in the prior year period. Our year-to-date FRE margin was 42.4%, approximately 100 basis points above the same period last year, and year-to-date fee-related earnings were $1.5 billion, increasing 19% over the same period last year. As Mike mentioned, we now expect the first close of the digital infrastructure fund later in the fourth quarter. Given the later timing of the first close for this fund and certain other funds that pay management fees on committed capital, we expect FRE margin growth for the full year 2026 will be slightly above the midpoint of our 0 to 150 annual basis point range. We expect to see greater margin benefits from this fund and others in 2027 with catch-up fees, providing additional support for our margins in the top half of our margin guidance range for 2027.

Turning to performance income. Realized net performance income was $12 million in the quarter. The slower transaction and realization environment in the industry over the past several years has mathematically pushed back the timing of European style waterfall payments for some of our funds, in many cases, by a year or more. These delays will modestly impact our expectations for the full year, which we now expect will come in at a range of $300 million to $325 million in total net realized performance income, implying $160 million to $185 million for the fourth quarter. This amount is expected to be roughly 90% from our European waterfall style funds.

At the midpoint, this amount would represent an 85% growth compared to 2025 levels. Despite the timing delays the underlying assets eligible to generate European-style performance fees, at the end of the third quarter are more than 3x the comparable assets we had in 2020. This growth is relevant since the payments we're receiving today are largely from our 2017 to 2020 vintage funds which today total $48 billion of incentive eligible AUM. Due to our fundraising success over the years, we now have more than $185 billion of EU style incentive eligible AUM, which we expect will drive significantly higher EU style net realized performance fees in future years.

Importantly, 75% of this incentive eligible AUM is in our private credit funds that are compounding performance income above their hurdles, and therefore, the slower repayment environment could theoretically increase the amount of performance income, all else equal. Realized income was $490 million for the quarter. After-tax realized income per share of Class A and nonvoting common stock was $1.26. Through the first 9 months of the year, realized income increased 20% to $1.5 billion and after-tax realized income per share increased 15% to $3.79. The tax rate for the quarter was just over 10%. We expect to be at the higher end of our 11% to 15% range in the fourth quarter due to the higher expected levels of FRPR and realized performance income in the fourth quarter. The underlying balance of future fee-generating capital also continues to grow. We ended the quarter with $174 billion of available capital.

AUM paying fees is $117 billion, including approximately $94 billion available for future deployment and over $2 billion of development assets not yet stabilized. If deployed or stabilized, these categories could collectively generate over $800 million of potential incremental annual management fees before considering future fundraising and subject to the assumptions described in our earnings materials. During the quarter, gross deployment was $35 billion, including over $18 billion by our drawdown funds. This embedded fee potential is important because it gives us visibility into future management fee growth without requiring a particular level of fundraising in any single quarter.

It also reflects the breadth of our deployment engine. As Mike discussed, activity was particularly strong across European direct lending, alternative credit, real estate and infrastructure. And we anticipate stronger deployment in the fourth quarter, which is nearly always our strongest deployment quarter of the year. As those transactions close, we would expect a greater portion of the capital we've already raised to begin contributing to fee paying AUM. For the third quarter, we had strong overall fund performance, with particular strength across our private credit strategies.

In alternative credit, the pathfinder series generated a gross return of 3.6% for the quarter and 15.2% over the last 12 months. U.S. senior direct lending generated a gross return of 3.3% for the quarter and 12% over the past 12 months. European Direct Lending gross returns were 2.2% and 8.1%, respectively. APAC Credit generated a gross return of 5% for the quarter and 17% over the last 12 months, and infrastructure debt generated 1.2% for the quarter and 7.3% over the last 12 months.

Within direct lending, underlying corporate fundamentals remain strong as portfolio companies generated strong year-over-year EBITDA growth in the 8% to 9% range. Interest coverage is at 2.1 and 2.3x, respectively, for U.S. and Europe. Loan to values remain near historic lows in the mid-40% range. The average company we finance today is much larger than in our earlier vintages that were tested in recessionary periods. Default rates in our portfolio continue to be very low and U.S. direct lending nonaccruals improved modestly to 1.8% from 1.9% in the prior quarter.

While we focus on the middle market, the companies we lend to are sizable, and we believe would typically rank in the top 1% to 2% of the largest companies in the U.S. by revenues. The relative size of our portfolios as well as the high diversification and low loan-to-value metrics within our portfolios should support strong aggregate recoveries on defaults in our view, given the significant amount of equity capital supporting our loans. Within our secondaries group, we continue to see strong performance. As a reminder, our private equity secondaries composite is disproportionately influenced by a legacy fund, which was primarily invested under the previous ownership. Fund 17, which is the first fund invested on the Ares platform by the current team continues to perform very well, generating a since inception gross IRR of 24%. Strong performance of Fund 17, along with APMF is corroborated by the significant investor demand we've seen in our recent PE secondaries fundraising.

Real estate performance held up relatively well in the quarter as the impact from rising rates was more than offset by improved operating cash flows, particularly in our global logistics properties, which account for 65% of our global real estate assets. Our 2 non-traded REITs each generated 2% quarterly returns and our European and Americas real estate equity composites, both demonstrated gross quarterly returns between 1% and 3%. While the impact on markets from rising interest rates has been minimal so far, commercial real estate markets are still digesting the recent adjustments and could see some near-term disruption in capital markets as a result.

However, we remain cautiously optimistic on the medium-term outlook as we believe real estate fundamentals are improving, while construction activity remains limited and new leasing continues to strengthen. Also within our Real Assets group, infrastructure equity continues to see strong fundamentals across the power, digital and transmission segments and generated a 3.7% return in the third quarter. In private equity, ACOF VI generated positive returns of 1.4% in the quarter and has a since inception gross IRR of 18.7%. The Fund benefited from a strong partial exit from 1 of its portfolio companies during the third quarter. In conclusion, our progress in the third quarter provides considerable momentum heading into the year-end. We expect fundraising to remain strong. The deployment pipeline is broad and remains at record levels and U.S. direct lending activity is improving as meaningful transactions have already closed in the fourth quarter.

For the full year 2026, we expect FRE growth to be within our 16% to 20% annualized growth target with some added growth tailwinds going into next year. We also expect growth in realized income within our 20% to 25% plus range. And as I previously mentioned, FRE margin growth slightly above the midpoint of our 0 to 150 basis points of annual expansion. Additionally, our substantial embedded fee growth from capital already raised but not yet paying fees, provides meaningful visibility into future management fee and FRE growth as we head into 2027.

I'll now turn the call back over to Mike for his concluding remarks.

Michael Arougheti

Thanks, Jarrod. As we step back from the quarter, the most important takeaway is that the Ares growth story is increasingly supported by multiple scale businesses rather than any single strategy or market. We're a performance-first investment firm, and we take a patient, highly selective long-term approach to investing. The investments that we've made in expanding our origination capabilities enable us to see a very broad view of our end markets so that we can be aggressive with our considerable dry powder as opportunities arise. The private market opportunity set continues to expand in large and growing TAMs and investor penetration remains relatively low.

Our businesses are benefiting from the organic and inorganic investments that we've made in expanding our tailored solutions offering, bolstering our sector and geographic origination capabilities as well as from the embedded and compounding growth in our large portfolios. At the same time, our emphasis on fostering our long-term investor, sponsor, borrower and lender relationships reinforces our ability to act as a stable reliable capital providers through market volatility and unexpected exogenous events. We believe this plays to our strengths as markets are becoming more volatile via rising interest rates and geopolitical concerns. Fundraising demand remains robust across our investment groups and across distribution channels.

The combination of record dry powder, along with significant fundraising in our U.S. direct lending strategy and expectations for continued fundraising momentum across infrastructure, digital infrastructure, real estate and secondaries gives us substantial capacity to invest and provides meaningful embedded earnings visibility. We're pleased with the progress that we're making and with the breadth of the opportunity ahead.

And as always, I want to end by thanking our employees around the world for their continued hard work and commitment to our clients and to our clients and our investors and shareholders for their trust and partnership. And operator, could you now please open the line for questions?

Operator

[Operator Instructions]

Our first question will come from Alex Blostein with Goldman Sachs.

分析师问答

Alexander Blostein

I wanted to start with the question just around the interest rate backdrop and implications for deployment activity, particularly in the U.S. direct lending space. Obviously, the private equity space has been, sort of, stuck in the mud here for quite some time. We've seen a little bit of an improvement, but since it's taken a bit of a step back. So how big of a reset do you think this is? Is it a pause? Or do you think that the projection for '27 could also be somewhat impacted by the change in interest rate backdrop for your deployment in U.S. direct lending?

Michael Arougheti

Yes. I don't read across high rates to mean slower deployment. As we've talked about on prior calls, there are broader factors at play, just namely the aging of the installed base of private equity-owned businesses. There's about 32,000 companies that are currently owned by private equity firms. It's about $3.5-plus trillion of capital on the ground. And you've got $1.5 trillion plus of dry powder that's also aging out. So the kind of weight of capital is ultimately going to be the driver of deployment. As I've said before, when the primary market slows, we begin to see a lot of that deployment opportunity pick up in other parts of the firm.

So not surprisingly, when the M&A environment is slowing for PE, we start to see a pickup in places like opportunistic credit secondaries, credit secondaries, GP solutions and the like. And so when you look at the diversification of the deployment, I just don't think that you're going to see the historical dependence on U.S. direct lending that we've seen in years past. But to U.S. direct lending specifically, I also think it's important that people understand where the pipelines sit today. And as Court and Jim articulated on the ARCC earnings call, we are going into the fourth quarter, which is our historically seasonally strongest period for deployment with record pipeline levels and we're beginning to see that pipeline convert early in the quarter. And so while we can't say for sure that, that record pipeline will convert in Q4.

We would expect it to start to roll through in Q4 and into the new year. So I think we're cautiously optimistic that we're going to see deployment in U.S. direct lending pickup here in the not-too-distant future.

Operator

We'll move next to Steven Chubak with Wolfe Research.

Steven Chubak

So I did want to dig into the digital interface and specifically around your position, just given you're one of the largest credit managers globally, admittedly had been a bit surprising that you were absent from some of the larger IG chip financings. I know the ABF team outlined their concerns on IG chip financing activity in the [ Entegas ] newsletter. But I was hoping that hear your perspective just on which exposure you're comfortable underwriting within digital infra what informs that stands and where you're seeing the most attractive deployment opportunities and the types of spreads that you're generating on that activity today.

Michael Arougheti

Sure. I'll try to be concise because we can probably take the whole call on talking about digital infra and AI. As you've seen, we have developed a full set of capital capabilities in debt and equity in the global markets around funding the CapEx super cycle. I think that does give us an opportunity as you articulated to really think about relative value in different places in the capital structure with different counterparties, et cetera. In its most simplistic form, the way I think about it is the identified CapEx need as of today is a little over $5 trillion between now and 2030. And if you break that down further, about $2 trillion of that is for the physical data center buildings and the adjacent power gen infrastructure and transmission. And then there's about $3 trillion of financing for GPUs and chips. I ground people in that because the $2 trillion is a huge TAM relative to the available capital in the market. And we think it's frankly a simpler underwriting with really attractive relative value.

And so without casting aspersions on GPU financing, I would maybe say that we are finding plenty of really attractive risk-return opportunities in debt and equity in that first $2 trillion bucket. As we talked about on prior calls, our data center development strategy is very focused on large metropolitan areas, places like Tokyo, Osaka, London, Atlanta, Amsterdam, Sao Paulo where we are building what we think are core compute data centers with the optionality to grow into the service the needs of the AI customer. They are pre-let to large investment-grade hyperscale counterparties on 12- to 15-year leases with no termination and inflation escalators.

And with that risk box, no pun intended, we feel like we can generate really attractive returns regardless of the ultimate technology outcomes here. And so I think our colleagues in ABF did a really nice job articulating some of the concerns around GP financings. They tend to be a little bit more complex. They tend to be a little bit more concentrated and at least I, for one, personally do not know how to underwrite the decline in depreciation curves on that type of technology. And so at least for the time being, we're kind of sticking to the half of the market, but we understand best and where our capability set is the deepest.

Operator

We'll move now to Craig Siegenthaler with Bank of America.

Craig Siegenthaler

So big picture question on the growth trajectories across AUM, FRE margin fees. So growth rates were a little slower in 3Q, but curious on your outlook on how they should trend into 2027. And do you view U.S. direct lending as the biggest source of upside or downside potential? And besides U.S. direct lending, what other businesses do you think could surprise us?

Michael Arougheti

Again, I would not focused on a single quarter in U.S. direct lending. And when you look at the momentum that business continues to have, as illustrated by the SDL first closing, the size of that, the pacing of that. The growth opportunity in the U.S. direct lending business is very much intact. And really, it's just a function of seeing some of that deployment that's growing in the pipeline come through.

I think Jarrod talked about the AUM not yet earning fees. I mean if you look at the math of it all, I would not articulate this as a decelerating growth trend. We are squarely in the middle of our guided ranges on our financial metrics and the accumulation of the AUM that we have now that is not yet earning fees is up about $100 million of potential management fee revenue year-on-year. And just given the fundraising momentum that we have, I think that, that sets us up for some pretty meaningful upside into I think 1 place where I would articulate, we probably have some upside that people can't see yet is on the digital infrastructure side.

We've talked a lot about the data center fund, the size of that and the pull-through of the revenue from that business because of the delay, what also will happen in 2027 is we'll get a pull through of some of the catch-up fees on that fund when it pulls through. So I think all else being equal, if that fund does what we expect it to, I think that, that will be a meaningful earnings catalyst for 2027 as well.

Operator

We'll move now to Benjamin Budish with Barclays.

Benjamin Budish

I was wondering if you could talk a little bit more about Ares core infrastructure. I think that's been 1 of your like pretty significant outperformers. Curious if there's any color you can share on capacity in that fund what's going particularly well? How should we think about kind of near and medium-term progress there? Any color there would be helpful.

Michael Arougheti

Yes. That's -- I appreciate you highlighting it. It's been a real bright spot, not just for our wealth business writ large, but for the infrastructure team, as I said in the prepared remarks, we pulled through about $2.7 billion of equity in the quarter. The AUM in that fund now is about $8.5 billion and continues to have a lot of success both on the capital raising and deployment side. From the infrastructure perspective, what it also has done is just broaden out our cost of capital and broaden out the nature of things that we can invest in to include more core infrastructure type projects and assets and we've typically been able to do before.

Needless to say, just given the momentum there, we have been continuously adding to our origination and portfolio management capabilities to support that growth. And the performance has been exactly as we hoped it would be the unlock there for us, aside from just identifying the scale of the addressable market opportunity there was structurally, it's tax-advantaged fund. And so we're actually able to deliver some pretty attractive equity-like returns on some core infrastructure assets. So I think it's a combination of the core infra exposure plus the tax attributes of the fund itself, but we're really excited about that. And again, I think it just demonstrates the continued diversification of the product set, the continued strength and wealth for the right products.

Operator

We'll hear next from Bill Katz with TD Cowen.

William Katz

Just a quick question, just a clarification for Jarrod. Wonder if you could just review the margin dynamics. Again, I thought I heard 2 different things between the prepared remarks and sort of the wrap up. But the broader question after you, Mike, is one of the traditional managers hosted call this morning, I mentioned that M&A is at a frenetic pace for the industry and certainly seeing a lot of deals happening around the industry. Maybe give us an update on where we stand and where you stand in terms of M&A, and I think there's been some articles out in terms of your interest in private equity. I sort of wondered if you could update us on your thinking from here.

Jarrod Phillips

Yes. Mike, I'll take the margin question first and great to hear from you, Bill. On margins, what I said in the prepared remarks is just that based on where we're at with the [indiscernible] fund raise in terms of the year, we thought we'd be closer to the midpoint of our margin guidance of the 0 to 150 basis points. And just like, as Mike noted, that will enable us to get some catch-up fees. That does give us a tailwind towards that upper end of the guidance for next year. So those are the 2 things I highlighted in the guidance in the prepared remarks.

Michael Arougheti

And with regard to M&A, our thinking has not changed. We have an incredibly robust corporate and operational strategy group that is consistently looking at things that are in the market as well as creating opportunities to grow organically and inorganically. The market backdrop is a good setup. I think that -- I don't know which of the managers said it, but the whole asset management space is moving to scale and consolidation. I think that's just because the benefits of scale are becoming more apparent in terms of the ability to invest in origination and portfolio management, distribution, compliance, technology. And so I think a lot of folks seeing that dynamic do not want to get left behind.

The bar for us has always been high, and I would say it's higher now than it's ever been, just given the competitive advantages we have and the opportunities that exist for us to continue to drive really high organic growth rates on new business builds. But we are constantly looking. Obviously, this week, we announced the the merger of [indiscernible] into ARCC. And so we will be opportunistic when the markets get choppy and show us opportunities, and we will be strategic in continuing to build up the global product set, but we're only going to do it at at the right price with the right people. And those are 2 boxes that aren't always easy to check. And so the bar is pretty high here.

Operator

We'll move next to Patrick Davitt with Autonomous Research.

Patrick Davitt

I have a follow-up on the ASF gross flow improvement comment you made, Mike, any tangible discussion points or indications from distributors underlying that comment or what you would expect given the dynamics.

Michael Arougheti

Yes. Again, I don't want to say that the BDC redemption story is a [indiscernible], but it's kind of getting in my opinion, a little bit too much airtime relative to the appetite that we're seeing broadly in wealth and broadly for private credit. And again, I would I would highlight that the speed and scale of the fund raise for SDL is demonstrating that the institutional investor is not at all spooked about private credit. And in fact, is doing the current market opportunity is giving them the advantage to maybe come back in and capture some share.

The numbers that we see is what's giving us the confidence. So if you look at where we sit today, the capital has been returned to investors who submitted a tender in Q1. And if you look at net new redemptions, we're down 60% quarter-over-quarter.

And when you look at net new tender requests, we're down -- that translates back 8% to 3.4%. As we've said before, that redemption queue has largely been concentrated in international wealth with small institutional and family office investors. And so it's very easy for us to see those organizations and see them burning down quarter-over-quarter.

As I articulated last quarter, too, that core well-advised individual wealth client is not exhibiting any kind of elevated redemption activity and the redemption levels that we've seen there are consistent and have been consistent with historical levels. So it's kind of getting this pig through the python of this concentrated international wealth [ queue ] and we're really advanced in that.

I would also just point you to the success that we're having in the other products despite the noise in U.S. private credit, we had our second best quarter on record in the wealth channel with a lot of appetite coming from the core platforms. So the secular growth theme of continued democratization of all it's an individual investor appetite is squarely intact.

Operator

We'll move now to Crispin Love with Piper Sandler.

Unknown Analyst

My question is on digital infrastructure, but a little bit broader, fixed income markets have been quite volatile in recent weeks around data center financing, neo cloud, spread widening. You've, of course, involved in the data center financing space. So can you share your outlook here you think the market is overreacting, just curious on your near- and longer-term outlook just in light of that recent price action.

Michael Arougheti

Yes. I don't know if the market's overreacting, I think you have a little bit of just price discovery as people are trying to understand the structural differences in each of these deals and there are structural nuances that exist in each one of these financings that people are just having to get level set on, I think people are being a little bit more discerning and discriminating about counterparty risk and how they want to price price that. And there is probably some crowding out of capital in the fixed income markets. That's a combination of just the insatiable demand for AI CapEx, coupled with sovereign yields widening, and I think people are just trying to figure out where the [indiscernible] settles out.

So I wouldn't call it overreacting. I think it's reacting appropriately just to the the demand for capital and making sure that it gets structured and priced appropriately. I'd expect that to continue.

Operator

We'll hear now from Bart Dziarski with RBC Capital Markets.

Bart Dziarski

We heard the term increasing diversification several times during prepared remarks and you've done a good job diversifying the asset base. Real assets are now about 1/4 of AUM. So just organically, should we expect that diversification to continue? And then inorganically, are you looking to increased diversification even further across asset classes?

Michael Arougheti

I didn't realize we had said diversification that much. Thanks for the question. Look, when you look at the credit franchise here, we've got market-leading position in alternative credit and ABS that is growing secularly and cyclically, we've got a market-leading franchise in U.S. direct lending, market-leading franchise and European track lending, market-leading franchise and Infradebt, so on and so forth. So as big and mature as some of those businesses are here. Our market share, as I said in the prepared remarks, is still pretty small against really large and growing TAMs. And I start there only to say that as we continue to grow and deepen the capability in the other parts of the business. It's just going to be hard for them to catch up to the scale and continued embedded growth in credit.

So I think the nice thing about this diversification is each of our businesses is growing kind of on the identified trend line. And so it's not just the diversification, but it's the diversification and contribution from each of these secondaries is growing well. Real estate is growing well. Infra is growing well. The credit business is growing well. The insurance business is growing well. So I think everything is keeping pace.

In terms of inorganic, I would expect that inorganic activities would focus on the noncredit parts of the business, just given the market share and capability dynamics there. And we've said before places that we have been looking are around the infrastructure asset classes, private equity, insurance. And so it is possible that through acquisition or partnership, the noncredit businesses play catch up. But I just think given the scale of the credit business, you should expect that the complexion of the product set is going to look a lot like it does today for the foreseeable future.

Operator

We'll hear now from Mike Brown with UBS.

Michael Brown

Maybe a question for you, Jarrod. You gave a lot of color on the net realized performance fee income. So I guess 4Q tracking a little bit below where we had expected but understandable just given the muted exit environment here. So with some of those realizations effectively shifting out into the right into '27. Any view into the potential range of outcomes for 2027, just given some of the visibility you have. But obviously, there's a bit of a range around that.

Jarrod Phillips

Sure. And Mike, the important part of that is really what I highlighted in the prepared remarks. The extraordinary growth we've had in the assets that generate those balances in those payments, we're still at the very beginning of highlighting that. So it's in the 2017 to 2020 vintages that have entered into a harvest period. What I'd say right now is it's a little harder for us to project out exactly within a year. We typically give multiyear. And we'll do that again at the end of the year in the fourth quarter and give an idea of what we figure the number would be for '27 and '28. And that's something, I think, in our Investor Day, you will see us refresh with a longer-term period. But the challenge really is, and we've talked about this a lot, if it happens in December, it happens in January, we're thrilled that it happened, but it's really hard to predict the exact date, and then that matters for the calendar and when it ultimately seen and recorded.

For what we are looking at, we've seen durations extend a little bit to your point, which has pushed some of these balances out. Now because it's predominantly credit assets, that's actually not a negative because we continue to tick above our hurdle rate in all of those funds actually earning a larger dollar amount that we'll eventually harvest. So stay tuned for more updates on exact numbers, but the fact is, is that we feel really good about the earnings power that we've developed on the balance sheet as a result of our fundraising.

Operator

We'll move now to Devin Ryan with Citizens Bank.

Devin Ryan

Good to hear about the direct lending pipeline and some of the acceleration you're seeing there. You mentioned that you agreed to purchase a $1.1 billion direct lending portfolio from an institutional investor. So I'm just curious how that kind of plays into the broader pipeline commentary. Are you seeing more of these portfolios potentially coming to the market. Just curious if it's maybe something that could become a more meaningful deployment channel? And just also what the returns look like on those types of purchases versus the directly originated loans.

Michael Arougheti

Yes, and that's a good question. It was coincidentally, we had the 2, we had the announcement of the [indiscernible] transaction, which won't close until the first half of next year, but we did have the $1.1 billion portfolio. I would think given, again, some of the commentary I made just around the aging of the installed base of PE deals and therefore, PE credit as well and the rate backdrop that we'll see more of this.

And what's interesting about these are not underperforming portfolios, both the institutional book we bought and MiFi or are largely performing books and they're not priced at distressed levels, but it's really a reflection of people repositioning their portfolios to meet the current market environment. If history is any indicator, we would expect to see more of this in the coming year or two. We are uniquely positioned to do it, both on the corporate M&A side and the portfolio acquisition side, just given the resources that we have to work through these things.

If you look at the [indiscernible] transaction, that's a 220 name portfolio, $2.6 billion of assets. And we -- you need to have familiarity with a lot of those names, but you also need to have the underwriting and portfolio management resources to understand the risk exposures you're taking and then the financing relationships and capital to do it. And so I think for some of these larger books we're really uniquely positioned to be the buyer of choice there. You'll see a fair amount of that roll through the direct lending portfolios in the U.S. and Europe, and you'll see some of that also roll through our credit secondaries business, which is enjoying a lot of growth right now because of that same dynamic.

So there may be some upside from those types of things to the USDL deployment. But again, I think I want to reemphasize the core pipelines in U.S. direct lending are sitting at record levels, and they are beginning to convert in Q4. So the deal flow is there. It's really just a question of seeing when it pulls through, but we're pretty confident that it will.

Operator

We'll move next to Michael Cyprus with Morgan Stanley.

Michael Cyprys

Just wanted to circle back to some of the commentary earlier around the large AI CapEx financing numbers that you cited over the next 5 years. Just curious how sensitive do you think that is the higher financing costs, just given the rate backdrop. And you've talked about some of the potential protections you put in place with high-quality outreach. But just curious how you think about the potential risks there and what risk do those contracts not protect you against?

Michael Arougheti

I'll -- I'm looking at Blair. I'll let him chime in here. I don't know that it's sensitive to rates, Michael, as much as maybe people think it is because the alternative is to finance it with [indiscernible]. So I think what we have been experiencing is as the CapEx numbers have continued to scale they went from largely equity-funded to then high-grade funded and now you're starting to see some of that funding demand flow through into the leveraged finance and private credit market. So there's an evolution here. But even as spreads are widening in certain parts of the market, it's still accretive relative to cost of equity capital. And so I don't that the weight of this demand is necessarily going to stop because of rate sensitivity. I don't know, Blair, if you have any comments on just kind of contractual protections and the way that we think about it.

Blair Jacobson

Yes. I think when we compare and contrast what we're seeing in the broader bond markets, those tend to be Tier 3 and front tier locations. They don't tend to face hyperscalers directly. They tend to be a little bit weaker developers. When you contrast what we're doing, we have a lot of inherent protections given the sites we're targeting given the counterparties, given the fact that they're pre-leased. Mike mentioned some of the terms of those leases, which tend to be very strong, and from a financing perspective, given the fact that these are $3 billion to $5 billion projects, not $40 billion projects, we've always gone to the bank markets. And that capital is still ready, willing and available. So I think there's a real distinction between our strategy and perhaps what you're seeing Royal, the bond markets a bit in the press.

Michael Arougheti

I'd also make one other comment. I don't know if people focus on enough. But if you look at data center capacity and demand, it's 65% plus of that is just core compute and not "AI" and so if you just think about the long-term secular trends of digitization of everything, increased streaming, e-commerce, data storage, et cetera, that baseload demand is kind of protective in and of itself. And I think to Blair's point, given the locations of where we're investing, they tend to feel a lot more like core infrastructure than had on the risk curve in terms of the technology or frontier.

Operator

We'll hear now from Brennan Hawken with BMO Capital Markets.

Brennan Hawken

I just had a follow-up to sort of Alex's question. You spoke to the impact of rates backing up and that -- what I'm curious about, though, is whether or not that's had any impact on spreads that you're seeing in the market. If you could speak to that, that would be great. Also you said you don't expect it to necessarily impact deployment. But previously, you had expected a pickup in deployment in the back half. And now that it feels like it's pushed to 4Q and it's going to be a little more seasonality. So am I reading too much into that? Or do you expect the 4Q pickup in deployment to translate into 1Q and maybe the first half of 2027 here?

Michael Arougheti

So I think you may be reading a little bit too much into it, historical deployment patterns in the direct lending business, we're seasonally slow in Q1 and Q3 and seasonally strong in Q2 and Q4 with Q4 typically being the strongest. And that's just generally the pacing of the deployment cycle, given summer breaks and holidays and tax planning. It also has to do with just the allocation cadence from the LP community, and that's been a 30-year structure of the market. I think that, that structure is still in place. So it is not surprising to us to see a slow Q3 and a strong Q4. That's generally how the deployment works.

The rate opportunity for us is pretty significant. I mean, if you look at our credit business, 83% of our assets in the credit group are floating rate and as base rates go up, that return flows through not just to the investor and increased IRR, but it flows through to us in increased profit.

And so what's interesting about where we are now, these credit portfolios have already been through a rate environment that was 100 basis points higher than where we are today. And if you look at interest coverage levels at the trough, they were kind of 1.6 to 1.7. And now they're sitting at 2.1 to 2.3 or 2.4. And so we know that these companies can handle higher debt service load because they've already managed through it.

So I think when we're looking at kind of the risk on the credit side from rates backing up relative to the opportunity to see that profit pull through. I think there's more of a P&L opportunity than not. And then in terms of spreads, spreads are kind of flat. As we talked about with some of the competitive dynamics and capital leaving the market. We saw spreads gap out 50 to 75 basis points earlier in the year. We saw fees and OID follow a similar pattern we did see and continue to see better documentation and kind of tighter covenants, but spreads typically react to changes in credit performance, not changes in base rate. And so until we see meaningful uptick in defaults and losses, I don't think that base rates in and of themselves are going to impact the spread environment.

The only other crosscurrent there is some of the things I mentioned earlier, just around the crowding out of capital that's going on in the market and whether or not people are just going to demand wider credit spreads across the spectrum, and that is altogether possible.

Operator

We'll hear next from Wilma Burdis with Raymond James.

Wilma Jackson Burdis

You guys guide to $160 million to $185 million of realized net performance income for 4Q '26. Does this mean a significant pickup in the transaction environment? Or is it based on what you're currently seeing in the market?

Jarrod Phillips

Yes. A lot of that, Wilma, is already baked in, in terms of tax payments that we received towards the end of the year for some of our vintage funds. As I talked about a little bit earlier and in the prepared remarks, as we look at that 2017 to 2020 vintage, we are seeing repayments begin to come from those, and we are seeing the associated then European waterfalls that are occurring. And because these are credit funds, it's easier to predict when some of those tax-related payments or some of those payments on monetizations underlying that are going to occur. So it's really based more on the predictability of the portfolio than it is based on a tremendous amount of transaction activity.

Operator

With no additional questions in queue at this time, I'd like to turn the floor back over to management for any additional or closing comments.

Michael Arougheti

None here, just thanks for everybody's time today, and I appreciate the continued support and look forward to talking to you guys next quarter. Thank you.

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 November 29, 2026 to domestic callers by dialing 1 (800) 839-1192 and to international callers by dialing 1 (402) 220-0402. An archived replay will also be available on a webcast link located on the homepage of the Investor Relations section of our website. Thank you.