00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordert. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg terminal and the Bloomberg Business app. 00:00:36 Speaker 3: So here's the laces this morning. 00:00:38 Speaker 2: Areas reporting at earning speed, highlighting another record quarter of fundraising with over thirty six billion dollars of inflows. The CEO, Mike karraghetti writing, our clients continue to reward us due to our strong and consistent fun performance across our strategies. Mike joins us now in a studio for more. Mike and morning, good to. 00:00:54 Speaker 3: See you, Good morning, Good morning. 00:00:55 Speaker 2: I wanted to start with a quite of yours from earlier this year when things were pretty difficult with the software issue, and you said something really important. You said the following, if you're going to under write a narrative of AI disruption, you also then have to say, well, what does that mean for the productivity and margin improvement for the rest of your book. I think that's a good place to start. Where are you seeing value being created right now? 00:01:15 Speaker 3: It's I'm glad I said that. 00:01:18 Speaker 4: So if you look at the way that ARIES is playing the AI transformation, it's what are we doing within the data center and digital infrastructure space, what are we doing within our portfolio companies, and what's that productivity uplift? And then what are we doing within ARES proper to either improve our investment outcomes or profitability. 00:01:40 Speaker 3: So if you start with ARES first. 00:01:42 Speaker 4: We're obviously deploying AI across the entire enterprise. We're seeing significant efficiency. We had one hundred basis point margin increase in the quarter year over year, and we've guided the street to expect zero to one hundred and fifty basis points per annum. A fair amount of that is technology efficiency that's getting created, reunderwriting processes, reunderwriting systems, and we are seeing uplift that is also translating into increased productivity and margin expansion within the portfolios. So if you were to look across our private equity portfolios, our private credit portfolios. Cash flow growth is still plus or minus ten percent. If you look at corporate earnings, I think you're going to see that that's. 00:02:20 Speaker 3: Generally the theme. 00:02:23 Speaker 4: And then within the investment space, we are doing our best to stay diversified in the way that we're attacking the digital infrastructure opportunity big investors in data center development, but I think our approaches tended to be a little bit more targeted. We're doing one hundred and fifty to three hundred megawatt deals hyper scale or adjacent in large tier one markets like Tokyo, London. South Paolo pre leased twelve to fifteen year terms with escalators, so we have probably shied away from some of the secondary and tertiary markets and stayed away from some of the frontier mard type of opportunities too. We're a very large lender in the infrastructure debt space and you're seeing that rolling through our earnings as well in terms of the fundraising and deployment momentum there. So we are one of the largest institutional lenders to other developers and that's been a bright spot. 00:03:17 Speaker 3: Three. We have a large. 00:03:18 Speaker 4: Asset based finance business and we're squaring off with a lot of the banks on SRTs and portfolio purchases where we're helping them free up liquidity on their balance sheet to continue to deploy into the opportunity. 00:03:31 Speaker 3: And then four, we have a. 00:03:32 Speaker 4: Very large infrastructure equity business where we're investing all around the digital ecosystem, transmission, fiber, battery, storage, etc. So we're kind of attacking it from all angles. But our view has been we want to be global, we want to be diversified, and we want to have the full capital structure so that we can move around where we see best relevance. 00:03:52 Speaker 2: That so the second word I want to take into diversified, and I'm open to the reality check. I'm just going to say, it feels it feels like a lot of people are in the same trait asset baked infrastructure debt on the credit side, and they're taking direct equity investments into say software and models. How do you avoid all the crowding that we're starting to see in other places. 00:04:11 Speaker 3: In digital, specifically within your firm. 00:04:14 Speaker 4: Yeah, I think the key in this goes if you look at our earnings this quarter and you put the numbers up on the screen, what screams out to me is just the broad based nature of the business and the diversification, and so the way that we think about private markets. We want to be up and down the capital structure, debt to equity, so that we can move around and find real to value and response to rates or the economic environment. We want to be horizontally diversified across all the different private market asset classes, secondaries, private equity, real estate, infra, and you'll see investor appetite and our own view of real to value shift. And then within the funds, we want to be highly highly diversified. So if you look at our credit funds as an example, I see nine hundred to one thousand line items, So we're not going to have any single exposure really drive the long term performance, and I think that's key. There is a risk in any investment business that you're over diversified, and I could argue maybe a thousand loans in one fund is overdiversified, but it's served us well over the thirty years that we've been doing it. 00:05:19 Speaker 5: Earlier this year, everyone was saying there's going to be a complete collapse, that the private credit space is going to go down in flames because of the retail investors, etc. And your compatriots and yourself are coming out and saying, WHOA not at all. We're seeing actually performance hang in there and people are still interested. Where are we in that in terms of interest from investors in private credit? How much the pendulum has shifted to the infrastructure and some of the other plays instead. 00:05:44 Speaker 4: Yeah, Look, we've been pioneers in private credit and people have been saying it's a bad place to be for thirty years, and it's grown pretty consistently and compounded at a very attractive ray of return. So anytime there's a narrative that's that loud, you've got to at least ask yourself what is it that they're looking at? 00:06:02 Speaker 3: We don't see it. 00:06:03 Speaker 4: If you look at our direct lending business, which is kind of where I think people are focused. Are non accruals across the direct lending business right now are inside of two percent. That is well below the historical averages. Our cash flow growth is plus or minus ten percent, as I said, and that's been consistent. We are seeing healthy interest coverage, very low loans to value. So the fundamental performance is exactly what was underwritten. A lot of the noise. You know, I don't really know where it's coming from. It could be coming from a competitive set of capital that doesn't like to see the flows. It could be it could be software related. But there's nothing that we see in the portfolios that would indicate. 00:06:45 Speaker 3: That credit's weakening. 00:06:47 Speaker 4: And the interesting is your question, and you see at this quarter in earnings, the institutional demand for private credit is probably accelerating right now because they're seeing spreads widening and they're seeing capital leave the mark and feel like there's an opportunity to come in and take share. So our last two credit funds, both in asset based finance and opportunistic credit, hit their hard caps and we had to demand well and access for the hard caps, and we raise those funds quicker than any prior vintage. 00:07:15 Speaker 5: It's fascinating to hear you talk about the performance of these loans, and it's something that we've seen from the likes of Capital One and some of these other credit card companies. The credit performance is hanging in there. It's actually hanging in there better than people expected. Where are we in this economic cycle based on some of the activity that you're seeing in portfolio companies. 00:07:29 Speaker 3: Yeah, it's. 00:07:31 Speaker 4: If anything, you could say growth is moderating slightly. So if we're growing cash flow portfolio wide nine to ten percent a year ago, that may have been eleven or twelve, but it's not negative. 00:07:44 Speaker 3: So you are slow growth. 00:07:46 Speaker 4: I mean, where are we It's still early And back to the first question from Jonathan. 00:07:51 Speaker 3: You're seeing margin. 00:07:52 Speaker 4: Improvement, productivity gains, balance sheets are healthy, companies are delevered. So it feels pretty good. And it's just not in corporate We see it in the real estate market too. We're well leased, we're seeing rent increases and strong demands, so everything. 00:08:07 Speaker 3: Feels really good. 00:08:08 Speaker 5: Right now, we're talking about leverage coming out of the system. In public markets, there was some concern that maybe leverage was building or there was some fraudy types of behavior. In private asset management, you talk about one hundred and seventy billion dollars of dry powder. I'm just wondering how you see some of these structural dynamics in the market in terms of ability to finance some of the huge bills coming and willingness to do so. 00:08:31 Speaker 4: Yeah, Look, I think one hundred and seventy billion of dry powder feels like a lot, but it's actually kind of in line with our annual deployment. So if you look at the thirty six billion that we raised this quarter, we also deployed thirty six billion. 00:08:45 Speaker 3: That's actually a lot quicker. 00:08:46 Speaker 4: Than historical used to take us probably two to three years to deploy our dry powder. We're now almost on an annual raise and deploy I think with regard to the digital capex, obviously there's seven hundred and fifty plus billion dollars of capex demand coming from the hyperscalers. That is a large amount of capital. It's beginning to quote unquote overwhelm the markets. And that's showing up in two ways. One, spreads are widening, which is not necessarily a bad thing, and people want to get paid more for the risk that they're taking. And it's probably slowing the pace of the built So you know, when you're thinking about deployment, this is not happening overnight. These are two to four year projects. You've got energy constraints, you've got community engagement and civic discussions that have to go well. So there's a lot that's actually constraining the coming online of some of this capbec so, at least as we're sitting here today, those numbers don't concern me. But your point is a good one. And going back to you know, a year ago, people were beginning to ask where's all this capital to come from? The capex numbers have doubled, and the market is, you know, is trying to keep pace, but it's going to be a little bit of a constraint. 00:10:00 Speaker 2: I think I thought you were about to ask whether Leopold had given Michael cool when you talked about a dry powder. 00:10:06 Speaker 5: Maybe, I mean, maybe you were the one that was the grim reaper calling, did you care some? 00:10:10 Speaker 1: I love those quotes. Did he give you a call? 00:10:14 Speaker 3: Breaking news? 00:10:16 Speaker 1: And we've got just. 00:10:17 Speaker 2: Get any lessons from that as you see that story, I don't know. 00:10:22 Speaker 3: I don't know enough to know. 00:10:23 Speaker 4: I think, if anything, maybe back to your prior question is be diversified number one, which is, you know, don't be fully exposed to one one factor or single correlation. I think that's, you know, that that might be the lesson. It might be that experience matters, and that you know, combination of smarts and experienced through cycles is ultimately important. 00:10:46 Speaker 3: And I think, you. 00:10:47 Speaker 4: Know, I think about our own thirty year journey and all the lessons that we've learned navigating cycles and painful one things, and you'll learn lessons the hard way, and so that that that might be the moral of the story too. 00:10:58 Speaker 2: Stay with us molbl impags Valance. Coming up after this, the former New Your Friend President Bill Dudley with a new op ed iitled Watch's approach to Fed policy is deeply flawed. He writes, outsourcing monetary policy to financial markets is a terrible idea. Watsh missed an opportunity to rebuild the Fed's credibility. Bill joined us now for more, Bill, welcome to the program. We were all watching that news conference and it didn't start terribly and then progressively it just got more and more confusing. What was the point in that news conference where you sat up and said this is weird. 00:11:39 Speaker 6: Well, it's weird when you're not explaining why three people are dissenting, yet the committee is deciding and no changing policies. It really was virtually no information about how the Fed Reserve is thinking about mandre policy, how the Fed Reserve is likely to react to incoming information in terms of how they adjust Manjar policy. The silence of Watsh was really quite definitely and the financial markets basically that thumbs down. I mean the fact that the thirty year yield went up to ten year wheel went up and two year yelds dropped really was a sign that there was a loss of credibility in that from that press. 00:12:12 Speaker 2: Conference, Bill, I want to highlight a distinction because I think it's important and it's in the body of your OPAD, and I want to say it for you. You're not against reducing forward guidance. This is important. I think that the complaints about the people doing the complaining often or around the idea that somehow we still want our hands being helled, that we want to hold on to the post GFC communication architecture, and Bill, I don't think that's what your criticism is about, no. 00:12:37 Speaker 6: I mean I wrote a group of thirty paper that we published in April, and one of the recommendations was to get rid of four guidance. The only time we really need four guides is when you're at the zero loor bound for interest rates and you're trying to provide additional monetary policy stimulus. But the rest of the time it really just sort of inhibits the FED and probably makes the FED a little bit slower to react to incoming information, But that doesn't mean you don't want to know what the Fed's monetary policy reaction function is. And I think that's the real problem Abortion and it's comments is conflating the two and they're very very different. If I don't understand how the FED reeser is going to react to incoming information, I can't price financial markets correctly. And it's also creating a lot of uncertainty about what policy is going to be in the future. 00:13:17 Speaker 1: Uh. 00:13:17 Speaker 6: You know, the market response on Wednesday was really FED credibility has lessened, and I think this is a. 00:13:25 Speaker 7: Really own goal on Kevin Wursh's part. 00:13:27 Speaker 6: You know, I think when one of the problems here, I think it is these overpromised and under delivered. You know, you've talked about, you know, see change at the FED, radical regime change, but then the markets are actually getting very very little in terms of guidance on how to think about the new FED. 00:13:42 Speaker 5: Well, we were discussing about where there maybe some of this was by design. There is going to be more volatility. There has been more volatility both at the front end and the long end, in response to every economic data point and comment coming from anyone on the Federal Reserve as a result of an absence of some sort of reaction function articulated by the FMCA. Do you think that this could be by design to help produce inflation without hiking rates. 00:14:05 Speaker 6: I don't think this is a really great strategy for a couple of reasons. Number One, it's a very inefficient way of tightening financial conditions. Basically, you're driving up risk bringing in markets. That's a dead weight loss to the economy. Number Two, how well can you actually control the market process to generate the impulse that you want to slow the economy down sufficiently? 00:14:25 Speaker 7: And lastly, you know it's a credibility issue. I mean, if the extent that the. 00:14:29 Speaker 6: Market's reacted the way they did on Wednesday, that's telling you that people are more worried about the Feds resolved to do the job. That means inflation expectations are less well anchored than they were prior to the press conference. 00:14:39 Speaker 7: That in itself makes the Fed's job harder. 00:14:42 Speaker 5: Bill how high is the bar for there to be I don't want to say mutiny, but the bulk of the FMC committee voting against the chair, potentially with the Governor's joining suit. 00:14:52 Speaker 6: I don't think we would get to that. I think at that point worsh was throwing the tonnel and vote with the majority. I can't imagine a situation where the chairman allows themselves to be outloaded by the Committee because if you if you had that result, it'd basically would be saying that the chairman has lost control of the Committee, and that's just not a very good look for any organization. 00:15:11 Speaker 1: Bill. 00:15:12 Speaker 2: It was also vague about the inflation target. That was confusing. Too vague on the inflation target, whether they'd respond to it, and what's aol they would use to respond? 00:15:20 Speaker 3: Can I pick up on that last point? 00:15:22 Speaker 2: Bill, he's flirting with the idea of using balance sheet instead of short term policy rights. 00:15:27 Speaker 3: Sure, right, Well, what do you think of it? 00:15:29 Speaker 7: Well? 00:15:30 Speaker 6: I think the problem here is that even if you reduce the balance sheet, you're probably going to be reduced by about a trillion dollars or so if you want to continue to have an ample reserves regime. And I think the commandment of the Committee is to maintain the ample reserve regime. And then the question is how much restraint is shrinking the balance sheet by a trillion dollar is going to be, it's actually gonna be very very small. So the idea that you know, you pull on this balance sheet lever and that allows you to not have to tighten monitary policy, I think is very much exaggerated. 00:15:56 Speaker 2: It's obvious that for the market, the primary tool is still the policy, right because it's in the reaction this morning to the sensitive economic eight that we've got moments ago on wages, they came in hotter labor costs. You saw yields rise at the front end of the curve. But we talked about this all morning, the credibility hit. You say, credibility has been hit. Others agree with you. Let's talk about how you repair it. When you do a job really badly, sometimes you have to do more than you otherwise would have had to do. How much more do they need to do now at this far of reserve to regain that credibility. 00:16:27 Speaker 7: Well, I think you have to follow up talk with actions. 00:16:29 Speaker 6: So I think that what's happened in financial markets over the last seventy two hours or so basically increases the pressure on the Fed to act in September. If it's a jump ball in September, you almost need to tighten now because you have lost credibility over the last couple of months. 00:16:44 Speaker 5: Do you think that it increases the chance of a larger than expected great hike. 00:16:49 Speaker 6: It's possible, but I don't think that you're so far away from your inflation objective that you know you need sort of shock therapy. If the feder Reserve did fifty basis points move, that would be, in my mind a little bit of the sign of desperation. Why didn't you like in July and you do fifty basis points in September. I think that's actually it is a confusing narrative as well. 00:17:09 Speaker 1: What do you think the overall motivation is here? 00:17:12 Speaker 5: I mean, we've been talking about this and a lot of people said Kevin worsh is a one hundred percent respected person by the mainstream of the financial markets, by the establishment. Do you think this is just Rookie's error, the classic kind of first press conference of a FED chair or do you think that there is some political motivation here trying to dodge the ire of the president going into the midterm elections. 00:17:35 Speaker 6: I can't judge that, but I generally think no, that he's not trying to do it to sort of modify the president. I think he really does believe that somehow outsourcing this to financial markets will improve the conduct of monetary policy. But you can't outsource it to financial markets for a very simple reason. Markets don't price to what the FED should do. They priced to what they think the FED will do. And so if you try to ask the markets, all you have is the market's looking the FED, the FED looking at markets, and the interest rate path is indeterminate. 00:18:01 Speaker 2: It's the word that we were talking about yesterday, which is everyone's pointing at each other. 00:18:06 Speaker 1: And I saw a couple versions of that FED. 00:18:08 Speaker 2: I'm sure you did, but it's going to see you. Thank you, buddy, go down do that if you're New York for president. Thank you very much, sir. I appreciate your time. Stay with us more Bloomberg Savanna's coming up after this, joining us now. General Robert Welsh of Academy Securities General, welcome back to the program, Sir. Is this situation now more dangerous than it was four or five months ago? 00:18:39 Speaker 8: I think overall the situation Iran has gotten much more dangerous. But I think the last piece that Tyler added, the peace on Gaza, makes it very significant that the larger Middle East peace plan. The Hamas disarmament agreement, which will take some time, is a big step in that it's an other step in isolating Iran, and what we're seeing throughout the Middle East more and more these pieces are coming into place. 00:19:07 Speaker 7: That is isolating Iran more and more. This was a case where the IRGC. 00:19:13 Speaker 8: Asked Hamas to delay this decision and not continue with it, and in fact they Hamas went against this and agreed to the disarmament. Now the devil's into details and we'll see where it goes. But this is a step in that direction. And the larger question is the situation with Iran getting more dangerous. It obviously is in the sense that we've gone from a phase of really deterrence where. 00:19:39 Speaker 7: Ceasefire was in place. 00:19:41 Speaker 8: We've kind of gone back and forth for with these attacks between Iran and the US have been occurring. But now what you're seeing is Iran again using their asymmetric capabilities to try to spread the fight and extend this throughout the region by bringing in the Houthis into it, bringing in the Shia Iraq militias into it, attacking the Saudi Arabia oil fields. So a little bit of a widening going on here, and that's Iran's asymmetric approaches to try to wordinate widen the war put more pressure on the US and the US's partners in the region general. 00:20:18 Speaker 5: What do you think the next steps will be for the US and its regional partners as the war does broaden now more significantly. 00:20:26 Speaker 8: Great question, Lise. I think the President has a lot of options on the table right now. I think the president's desires to get back to getting a deal. He continues to say that over and over, and you saw where we had this thirteen day significant escalation by the US, and this was now for the first time, instead of a tit for tat approach, the US used a disproportion approach where if Iran hit US with three missiles, we went back and hit them with hundreds of attacks on. 00:20:56 Speaker 7: Targets throughout the Golfer each or throughout Iran. 00:21:00 Speaker 8: But with that, now that what we're seeing is that's the president again kind of settled things down, stop those attacks to see if negotiations could continue. And I think the options he's got now is you know, one that Admiral Cooper has on the plate is to go much larger and really try to increase the number attacks more along the ways of what we were doing earlier in the war, but again really trying to isolate the straight of horror moves by attacking you know, command control facilities, drone and missile capabilities that can strike the straits of horror moves. 00:21:36 Speaker 3: That would probably be a phase one approach. See how that goes, and if you can. 00:21:41 Speaker 8: Get around to kind of back off and try to you know, push their will to the point where they want to get back to the negotiating table, get to a ceasefire, that would be a step. If that doesn't work, I think another option on the table is to go really big, and that would be to try to isolate the country itself to really significantly after probably bringing in Israel, go after infrastructure targets throughout the region. 00:22:06 Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, a geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.