WEBVTT - Ares Management CEO & Co-Founder Mike Arougheti Talks Record Earnings

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Areas reporting at NXP highlighting another record quarter of fundraising

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<v Speaker 2>with over thirty six billion dollars of inflows. The CEO,

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<v Speaker 2>Mike karraghetti writing, our clients continue to reward us due

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<v Speaker 2>to our strong and consistent fund performance across our strategies.

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<v Speaker 2>Mike joins us now in a studio for more Mike

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<v Speaker 2>and morning, Good.

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<v Speaker 3>To see, Good morning, Good morning.

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<v Speaker 2>I wanted to start with a quite of yours from

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<v Speaker 2>earlier this year when things were pretty difficult with the

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<v Speaker 2>software issue, and you said something really important. You said

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<v Speaker 2>the following. If you're going to underwrite a narrative of

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<v Speaker 2>AI disruption, you also then have to say, well, what

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<v Speaker 2>does that mean for the productivity and margin improvement for

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<v Speaker 2>the rest of your book. I think that's a good

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<v Speaker 2>place to start. Where are you seeing value being created

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<v Speaker 2>right now?

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<v Speaker 3>It's I'm glad I said that.

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<v Speaker 4>So if you if you look at the way that

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<v Speaker 4>ARIES is playing the AI transformation, it's what are we

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<v Speaker 4>doing within the data center and digital infrastructure space, what

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<v Speaker 4>are we doing within our portfolio companies and what's that

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<v Speaker 4>productivity uplift? And then what are we doing within Aries?

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<v Speaker 4>Proper to either improve our investment outcomes or profitability. So

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<v Speaker 4>if you start with aries first, we're obviously deploying AI

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<v Speaker 4>across the entire enterprise. We're seeing significant efficiency. We had

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<v Speaker 4>one hundred basis point margin increase in the quarter year

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<v Speaker 4>over year, and we've guided the street to expect zero

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<v Speaker 4>to one hundred and fifty.

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<v Speaker 3>Basis points per annum.

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<v Speaker 4>A fair amount of that is technology efficiency that's getting created,

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<v Speaker 4>re underwriting processes, reunderwriting systems, and we are seeing uplift

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<v Speaker 4>that is also translating into increased productivity.

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<v Speaker 3>And margin expansion within the portfolios.

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<v Speaker 4>So if you were to look across our private equity portfolios,

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<v Speaker 4>our private credit portfolios, cash flow growth is still plus

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<v Speaker 4>or minus ten percent. If you look at corporate earnings,

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<v Speaker 4>I think you're going to see that that's generally the theme.

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<v Speaker 4>And then within the investment space, we are doing our

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<v Speaker 4>best to say diversified in the way that we're attacking

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<v Speaker 4>the digital infrastructure opportunity big investors in data center development,

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<v Speaker 4>but I think our approaches tended to be a little

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<v Speaker 4>bit more targeted. We're doing one hundred and fifty to

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<v Speaker 4>three hundred megawatt deals, hyperscal er adjacent in large tier

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<v Speaker 4>one markets like Tokyo, London, South Paolo pre leased twelve

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<v Speaker 4>to fifteen year terms with escalators, so we have probably

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<v Speaker 4>shied away from some of the secondary and tertiary markets

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<v Speaker 4>and stayed away from some of the frontier model type

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<v Speaker 4>of opportunities too. We're a very large lender in the

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<v Speaker 4>infrastructure debt space and you're seeing that rolling through our

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<v Speaker 4>earnings as well in terms of the fundraising and deployment

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<v Speaker 4>momentum there. So we are one of the largest institutional

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<v Speaker 4>lenders to other developers and that's been a bright spot.

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<v Speaker 3>Three.

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<v Speaker 4>We have a large asset based finance business and we're

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<v Speaker 4>squaring off with a lot of the banks on SRTs

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<v Speaker 4>and portfolio purchases where we're helping them free up liquidity

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<v Speaker 4>on their balance sheet to continue to deploy into the

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<v Speaker 4>opportunit unity.

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<v Speaker 3>And then for we have a.

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<v Speaker 4>Very large infrastructure equity business where we're investing all around

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<v Speaker 4>the digital ecosystem, transmission, fiber, battery, storage, etc. So we're

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<v Speaker 4>kind of attacking it from all angles. But our view

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<v Speaker 4>has been we want to be global, we want to

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<v Speaker 4>be diversified, and we want to have the full capital structure.

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<v Speaker 4>So that we can move around where we see best

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<v Speaker 4>releatanive that.

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<v Speaker 2>So the second word I want to dig into diversified,

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<v Speaker 2>and I'm open to the reality check. I'm just going

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<v Speaker 2>to say it feels it feels like a lot of

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<v Speaker 2>people are in the same trait. They're an asset backed

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<v Speaker 2>infrastructure debt on the credit side, and they're taking direct

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<v Speaker 2>equity investments into say software and models. How do you

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<v Speaker 2>avoid all the crowding that we're starting to see in

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<v Speaker 2>other places.

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<v Speaker 3>In digital, specifically with your firm. Yeah, I think the

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<v Speaker 3>key in.

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<v Speaker 4>This goes if you look at our earnings this quarter

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<v Speaker 4>and you put the numbers up on the screen, what

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<v Speaker 4>screams out to me is just the broad base nature

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<v Speaker 4>of the business and the diversification. And so the way

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<v Speaker 4>that we think about private market. We want to be

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<v Speaker 4>up and down the capital structure debt to equity, so

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<v Speaker 4>that we can move around and find real to value

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<v Speaker 4>and response to rates or the economic environment. We want

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<v Speaker 4>to be horizontally diversified across all the different private market

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<v Speaker 4>asset classes, secondaries, private equity, real estate, infra, and you'll

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<v Speaker 4>see investor appetite and our own view of real to

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<v Speaker 4>value shift. And then within the funds, we want to

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<v Speaker 4>be highly highly diversified. So if you look at our

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<v Speaker 4>credit funds as an example, you may see nine hundred

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<v Speaker 4>to one thousand line items. So we're not going to

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<v Speaker 4>have any single exposure really drive the long term performance,

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<v Speaker 4>and I think that's key.

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<v Speaker 3>There is a risk in any investment.

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<v Speaker 4>Business that you're over diversified, and I could argue maybe

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<v Speaker 4>one thousand loans in one fund is overdiversified, but it

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<v Speaker 4>served us well over the thirty years that we've been

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<v Speaker 4>doing it.

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<v Speaker 1>Earlier this year, everyone was saying there's going to be

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<v Speaker 1>a complete collapse, that the private credit space is going

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<v Speaker 1>to go down in flames because of the retail investors, etc.

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<v Speaker 1>And your compatriots and yourself coming out and saying, WHOA,

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<v Speaker 1>not at all. We're seeing actually performance hang in there

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<v Speaker 1>and people are still interested. Where are we in that

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<v Speaker 1>in terms of interest from investors in private credit? How

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<v Speaker 1>much the pendulum has shifted to the infrastructure and some

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<v Speaker 1>of the other plays instead.

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<v Speaker 4>Yeah, Look, we've been pioneers in private credit and people

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<v Speaker 4>have been saying it's a bad place to be for

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<v Speaker 4>thirty years and it's grown pretty consistently and compounded at

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<v Speaker 4>a very attractive ray of return. So anytime there's a

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<v Speaker 4>narrative that's that loud, you've got to at least ask yourself,

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<v Speaker 4>you know, what is it that they're looking at?

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<v Speaker 3>We don't see it.

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<v Speaker 4>If you look at our direct lending business, which is

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<v Speaker 4>kind of where I think people are focused, are non

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<v Speaker 4>accruals across the direct lending business right now are inside

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<v Speaker 4>of two percent. That is well below the historical averages.

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<v Speaker 4>Our cash flow growth is plus or minus ten percent,

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<v Speaker 4>as I said, and that's been consistent. We are seeing

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<v Speaker 4>healthy interest coverage, very low loans to value. So the

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<v Speaker 4>fundamental performance is exactly what was underwritten. A lot of

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<v Speaker 4>the noise, you know, I don't really know where it's

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<v Speaker 4>coming from. It could be coming from a competitive set

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<v Speaker 4>of capital that doesn't like to see the flows. It

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<v Speaker 4>could be it could be software related. But there's nothing

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<v Speaker 4>that we see in the portfolios that would indicate that

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<v Speaker 4>credit's weakening. And the interesting is your question, and you

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<v Speaker 4>see at this quarter in earnings, the institutional demand for

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<v Speaker 4>private credit is probably accelerating right now because they're seeing

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<v Speaker 4>spreads widening and they're seeing capital leave the market and

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<v Speaker 4>feel like there's an opportunity to come in and take share.

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<v Speaker 4>So our last two credit funds, both in asset based

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<v Speaker 4>finance and Opportunistic Credit, hit their hard caps and we

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<v Speaker 4>had to demand well and access for the hard caps,

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<v Speaker 4>and we raise those funds quicker than any prior vintage.

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<v Speaker 1>It's fascinating to hear you talk about the performance of

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<v Speaker 1>these loans, and it's something that we've seen from the

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<v Speaker 1>likes of Capital One and some of these other credit

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<v Speaker 1>card companies. The credit performance is hanging in there. It's

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<v Speaker 1>actually hanging in there better than people expected. Where are

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<v Speaker 1>we in this economic cycle based on some of the

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<v Speaker 1>activity that you're seeing in portfolio companies.

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<v Speaker 4>Yeah, if anything, you could say growth is moderating slightly.

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<v Speaker 4>So if we're growing cash flow portfolio wide nine to

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<v Speaker 4>ten percent a year ago, that may have been eleven

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<v Speaker 4>or twelve, but it's not negative. So you are slow growth.

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<v Speaker 4>I mean, where are we? It's still early And back

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<v Speaker 4>to the first question from Jonathan. You're seeing margin improvement,

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<v Speaker 4>productivity gains, balance sheets are healthy, companies are delevered, so

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<v Speaker 4>it feels pretty good and it's just not in corporate

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<v Speaker 4>We see it in the real estate market too. We're

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<v Speaker 4>well leased We're seeing rent increases and strong demands, so

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<v Speaker 4>everything feels really good right now.

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<v Speaker 1>We're talking about leverage coming out of the system. In

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<v Speaker 1>public markets, there was some concern that maybe leverage was

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<v Speaker 1>building or there was some fraudy types of behavior. In

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<v Speaker 1>private asset management. You talk about one hundred and seventy

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<v Speaker 1>billion dollars of dry powder. I'm just wondering how you

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<v Speaker 1>see some of these structural dynamics in the market in

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<v Speaker 1>terms of ability to finance some of the huge bills

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<v Speaker 1>coming and willingness to you.

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<v Speaker 4>So, yeah, look, I think one hundred and seventy billion

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<v Speaker 4>of dry powder feels like a lot, but it's actually

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<v Speaker 4>kind of in line with our annual deployment. So if

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<v Speaker 4>you look the thirty six billion that we raised this quarter,

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<v Speaker 4>we also deployed thirty six billion.

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<v Speaker 3>That's actually a lot quicker.

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<v Speaker 4>Than historical used to take us probably two to three

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<v Speaker 4>years to deploy.

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<v Speaker 3>Our dry powder. We're now almost on an annual raise and.

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<v Speaker 4>Deploy I think with regard to the digital capex, obviously

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<v Speaker 4>there's seven hundred and fifty plus billion dollars of capex

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<v Speaker 4>demand coming from the hyperscalers. That is a large amount

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<v Speaker 4>of capital it's beginning to quote unquote overwhelm the markets.

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<v Speaker 4>And that's showing up in two ways. One, spreads are widening,

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<v Speaker 4>which is not necessarily a bad thing, and people want

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<v Speaker 4>to get paid more for the risk that they're taking.

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<v Speaker 4>And it's probably slowing the pace of the built. So

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<v Speaker 4>you know, when you're thinking about deployment, this is not

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<v Speaker 4>happening overnight. These are two to four year projects. You've

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<v Speaker 4>got energy constraints, you've got the engagement and civic.

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<v Speaker 3>Discussions that have to go well. So there's a lot

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<v Speaker 3>that's actually.

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<v Speaker 4>Constraining the coming online of some of this capbec so,

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<v Speaker 4>at least as we're sitting here today, those numbers don't

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<v Speaker 4>concern me. But your your point is a good one.

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<v Speaker 4>And going back to you know, a year ago, people

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<v Speaker 4>were beginning to ask where's all this capital to come from?

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<v Speaker 3>The CAPEX numbers have doubled.

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<v Speaker 4>And the market is you know, is trying to keep pace,

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<v Speaker 4>but it's going to be a little bit of a constraint.

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<v Speaker 2>I think I thought you were about to ask whether

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<v Speaker 2>Leopold had given Micah coole when you talked about a

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<v Speaker 2>dry powder.

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<v Speaker 1>Maybe, I mean, maybe you were the one that was

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<v Speaker 1>the grim reaper calling, did you care some?

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<v Speaker 3>I love those quotes.

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<v Speaker 2>Did he give you a quo?

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<v Speaker 3>Breaking news? And we've got to.

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<v Speaker 2>Get any lessons from that as you see that story.

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<v Speaker 3>I don't know. I don't know enough to know.

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<v Speaker 4>I think, if anything, maybe back to your prior question

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<v Speaker 4>is be diversified number one, which is, you know, don't

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<v Speaker 4>be fully exposed to one one factor or single correlation.

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<v Speaker 4>I think that's you know, that that might be the lesson.

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<v Speaker 4>It might be that experience matters, and that you know, uh,

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<v Speaker 4>combination of smarts and experience through cycles is ultimately important.

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<v Speaker 4>And I think, you know, I think about our own

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<v Speaker 4>thirty year journey and all the lessons that we've learned

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<v Speaker 4>navigating cycles and kindful want things, and you'll learn lessons

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<v Speaker 4>the hard way, and so that that that might be

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<v Speaker 4>the moral of the story too.

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<v Speaker 2>Mike appreciate it. Thank you, Thank you, buddy, Thanks for jak.

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<v Speaker 2>Thank you very much. Michael gets you there the are

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<v Speaker 2>c e O