Speaker 1: Bloomberg Audio Studios, podcasts, radio News.
Speaker 2: Welcome back, we are here at the Milken Global Conference.
Speaker 2: Join now by Aris Management CEO Michael Arraghetti. Thank you
Speaker 2: for joining us here on sech Good to see again.
Speaker 2: A lot of conversation going on. We have to start
Speaker 2: with tariffs. I mean, it's kind of taking up all.
Speaker 1: The you heard of the room these days.
Speaker 2: What do you make of the strategy that you're seeing
Speaker 2: from the administration and how you as an investor react
Speaker 2: to it.
Speaker 3: Yeah, Look, we try to stay above the politics and
Speaker 3: just think about where the market served going and how
Speaker 3: it affects capital flows in our business. I think the
Speaker 3: good news, generally from an Ari's perspective, is the businesses
Speaker 3: that we invest in tend to be middle market service
Speaker 3: companies that have their customer base in local currency, local markets.
Speaker 3: So we don't really invest in a lot of companies
Speaker 3: that make things or have to grapple with supply chain
Speaker 3: issues or tariffs. So I think in terms of the
Speaker 3: first order impacts, we're pretty unaffected. Obviously, the longer that
Speaker 3: these trade and balances go on and the trade wark
Speaker 3: goes on, it affects everybody just in terms of the
Speaker 3: economic impact and that's what we're keeping.
Speaker 1: An eye out for.
Speaker 3: But so far we're just kind of in a weight
Speaker 3: and see mode, and hopefully we'll get some information next
Speaker 3: week or two that'll give some people some clarity, a lot.
Speaker 2: Of weight and see going around. What about the difference
Speaker 2: that you see between smaller and middle sized companies and
Speaker 2: the larger ones. There's a lot of concerns that there
Speaker 2: will be a disproportionate impact to the changes in policy
Speaker 2: for those middle sized companies.
Speaker 1: Yeah, I'm not sure I agree with that.
Speaker 3: The reality is most middle market companies are insulated from
Speaker 3: some of the large cross.
Speaker 1: Border impacts of the tariffs.
Speaker 3: And I could craft an argument that they're actually more
Speaker 3: protected in some respects from some of the issues that
Speaker 3: we're grappling with. That being said, if we start to
Speaker 3: head into a recessionary environment, they'll bear the brunt of it.
Speaker 3: So again, it could break either way, and we're just
Speaker 3: going to have to react to what the market gives us.
Speaker 2: What do you make of the relationship that is changing
Speaker 2: between the two world economics superpowers, the US and China.
Speaker 2: Of course, a lot of investors have looked more and
Speaker 2: more to China, to Asia more largely but of course
Speaker 2: the tear of escalation has not been helpful to that movement.
Speaker 2: Do you think that there's some reversal there that will
Speaker 2: happen in the future.
Speaker 3: Look, we invest money on behalf of institutions and individual
Speaker 3: investors all over the globe. We have a large business
Speaker 3: in the Asia Pacific region. You know, part of our
Speaker 3: business is benefiting in terms of people allocating to other
Speaker 3: regions of the world where we have capability and capacity.
Speaker 3: Our industrial logistics business is actually benefiting from some of
Speaker 3: the changes we're seeing around the global supply chain, near
Speaker 3: shoring and reshoring and China plus one. So there's always
Speaker 3: going to be puts in takes. The reality is is
Speaker 3: very few investors US dollar investors have been investing into
Speaker 3: the China market it over the last many years, so
Speaker 3: we're not really seeing that significant amount of disruption.
Speaker 2: You know, it's interesting at a time where a lot
Speaker 2: of people are looking around and seeing capital kind of frozen,
Speaker 2: you've actually raised a significant amount in places like private credit.
Speaker 2: What do you think you're doing differently here and what
Speaker 2: does it mean for your ability to bring in more
Speaker 2: interest from investors for the rest of the year.
Speaker 3: Yeah, we were fortunate last year we had a record
Speaker 3: year fundraising. We pulled in about ninety three billion dollars
Speaker 3: of new aum this first quarter, we just had earnings yesterday.
Speaker 3: We added another twenty billion dollars to the dry powder pile.
Speaker 3: We have about one hundred and forty five billion dollars
Speaker 3: to invest I think what we're doing differently from a
Speaker 3: positioning standpoint is number one, we have a broad, diversified
Speaker 3: global business. So I just think that we're giving investors
Speaker 3: a lot of choice as to where they want to
Speaker 3: play and what risks.
Speaker 1: They want to take.
Speaker 3: As probably one of the pioneers or leaders in private credit,
Speaker 3: we're one of the few managers that actually has a
Speaker 3: track record that go those you know, back twenty thirty
Speaker 3: years where people can see how we've performed through cycles.
Speaker 1: And then, as we often talk with investors, if you.
Speaker 3: Look at our private credit strategies today, broadly across real
Speaker 3: assets in corporate we're generating twelve to fifteen percent rates
Speaker 3: of return right now, So on a relative value basis,
Speaker 3: I think with this amount of uncertainty on the forward
Speaker 3: path of earnings valuations, I think most investors are just
Speaker 3: finding it frankly easier, you know, to take shelter in
Speaker 3: the credit markets and make those kind of load of
Speaker 3: mid teens returns without having to worry about that equity
Speaker 3: risk premium.
Speaker 2: Wait, what's fueling that return? Is it because rates have
Speaker 2: remained higher?
Speaker 3: Ultimately, yes, it's clearly a reflection of the base rate environment.
Speaker 3: Rates are now starting to drift down, as everybody knows.
Speaker 3: But as they are and concerns about economic weakness are
Speaker 3: seeping in, credit spreads are starting to widen out. So
Speaker 3: while rates are coming down, I think people felt the
Speaker 3: asset class was going to be much more rate sensitive
Speaker 3: than it actually is because we're making up for that
Speaker 3: reduction with credit spreads.
Speaker 2: As I talked to you and your peers, I can't
Speaker 2: help but think that there might be actually around the
Speaker 2: corner in the wake of some of this turmoil, a
Speaker 2: goals and opportunity that's forming to deploy larger and larger dollars.
Speaker 2: Given how much valuations have corrected, What does that opportunity
Speaker 2: look like?
Speaker 3: Look, I think we now having been in business for
Speaker 3: thirty years, have seen that we actually have grown faster
Speaker 3: through periods of dislocation. So the fastest growth we ever
Speaker 3: had was through the GFC In terms of our profitability
Speaker 3: and our aum second was through the COVID pandemic, and
Speaker 3: that's a combination of just the unique structures that we
Speaker 3: manage the capabilities that we have.
Speaker 1: So typically whenever we have voll.
Speaker 3: To markets or dislocation, it creates opportunity. What's unique about
Speaker 3: this moment is the amount of investments that have already
Speaker 3: been made in the private markets at high valuations that
Speaker 3: were reflecting the lower rate environment is of a magnitude
Speaker 3: that we haven't seen before. And so the resolution, if
Speaker 3: you will, of all of the those assets that need
Speaker 3: to reset basis, we think is going to be a
Speaker 3: massive opportunity in places like secondaries, opportunistic credit, opportunistic real estate.
Speaker 3: So you know, around the halls of areas are actually
Speaker 3: quite excited about the future.
Speaker 2: So secondaries is a good place to dive in for
Speaker 2: a moment here because you are seeing a lot of
Speaker 2: limited partners looking to sell. Some of that is their
Speaker 2: own liquidity concerns that we're hearing about, but also, Mike,
Speaker 2: the private equity industry has been holding onto assets for years.
Speaker 2: The IPO window has not opened in a meaningful way.
Speaker 2: This was supposed to be the big year didn't happen,
Speaker 2: not really yet. M and A also pretty stalled. What
Speaker 2: does that mean for the private equity industry? Can they
Speaker 2: keep borrowing to keep the party going?
Speaker 1: I think they can.
Speaker 3: I mean the financial incentives in private equity are aligned
Speaker 3: to long term equity value creation, and that may require
Speaker 3: holding these assets for longer. There's a real tension in
Speaker 3: the market now from limited partners who want to see
Speaker 3: a return of capital before reinvesting. But the opportunities for
Speaker 3: liquidity have gotten much more innovative and creative and complex.
Speaker 1: So if you're a private equity GP.
Speaker 3: Today, the entire market there's about three plus trillion dollars
Speaker 3: of private equity invested. Sixty percent of that private equity
Speaker 3: is four and a half years older or more. There's
Speaker 3: about a trillion dollars of equity that has not been invested,
Speaker 3: and so the challenge that the private equity industry is
Speaker 3: facing is do I take my trillion dollars and invest
Speaker 3: it into this new market where there's probably good opportunity,
Speaker 3: or do I use it to support valuation and growth
Speaker 3: in the existing portfolio. But you can't do both, and
Speaker 3: that's where secondaries comes in. So we're seeing significant demand
Speaker 3: from the GP community as well as the LP community
Speaker 3: to kind of figure out how to recapture some of
Speaker 3: that three trillion and get it back to investors.
Speaker 2: So you had to describe that tension between investors and
Speaker 2: their private asset firms.
Speaker 1: What is it? I'm not sure there's a tension.
Speaker 3: I actually think that most sophisticated LPs, which is largely
Speaker 3: all of them, understand the world that we live in,
Speaker 3: and I don't think that they want to see assets
Speaker 3: getting monetized at valuations that don't reflect the intrinsic value.
Speaker 3: That being said, they want to participate in this new vintage,
Speaker 3: and so if there's a tension, it's really how do
Speaker 3: I capture this wonderful opportunity set that you just referred
Speaker 3: to without compromising value creation and existing portfolio and not
Speaker 3: just a dialogue. You know, and gps and LPs are
Speaker 3: all going to be in a different place depending on
Speaker 3: their liquidity or the age of their portfolio or franking
Speaker 3: the performance of the underlying portfolio.
Speaker 2: Certainly the topic of the day and areas is right
Speaker 2: in the middle of it.
Speaker 1: Mike, we have to leave it there.
Speaker 2: We thank you so much for joining us here on
Speaker 2: set that is Mike Arraghetti, of course, the CEO of
Speaker 2: ares here at the Milk and Bubble Institute