Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Areas reporting at NXP highlighting another record quarter of fundraising
Speaker 2: with over thirty six billion dollars of inflows. The CEO,
Speaker 2: Mike karraghetti writing, our clients continue to reward us due
Speaker 2: to our strong and consistent fund performance across our strategies.
Speaker 2: Mike joins us now in a studio for more Mike
Speaker 2: and morning, Good.
Speaker 3: To see, Good morning, Good morning.
Speaker 2: I wanted to start with a quite of yours from
Speaker 2: earlier this year when things were pretty difficult with the
Speaker 2: software issue, and you said something really important. You said
Speaker 2: the following. If you're going to underwrite a narrative of
Speaker 2: AI disruption, you also then have to say, well, what
Speaker 2: does that mean for the productivity and margin improvement for
Speaker 2: the rest of your book. I think that's a good
Speaker 2: place to start. Where are you seeing value being created
Speaker 2: right now?
Speaker 3: It's I'm glad I said that.
Speaker 4: So if you if you look at the way that
Speaker 4: ARIES is playing the AI transformation, it's what are we
Speaker 4: doing within the data center and digital infrastructure space, what
Speaker 4: are we doing within our portfolio companies and what's that
Speaker 4: productivity uplift? And then what are we doing within Aries?
Speaker 4: Proper to either improve our investment outcomes or profitability. So
Speaker 4: if you start with aries first, we're obviously deploying AI
Speaker 4: across the entire enterprise. We're seeing significant efficiency. We had
Speaker 4: one hundred basis point margin increase in the quarter year
Speaker 4: over year, and we've guided the street to expect zero
Speaker 4: to one hundred and fifty.
Speaker 3: Basis points per annum.
Speaker 4: A fair amount of that is technology efficiency that's getting created,
Speaker 4: re underwriting processes, reunderwriting systems, and we are seeing uplift
Speaker 4: that is also translating into increased productivity.
Speaker 3: And margin expansion within the portfolios.
Speaker 4: So if you were to look across our private equity portfolios,
Speaker 4: our private credit portfolios, cash flow growth is still plus
Speaker 4: or minus ten percent. If you look at corporate earnings,
Speaker 4: I think you're going to see that that's generally the theme.
Speaker 4: And then within the investment space, we are doing our
Speaker 4: best to say diversified in the way that we're attacking
Speaker 4: the digital infrastructure opportunity big investors in data center development,
Speaker 4: but I think our approaches tended to be a little
Speaker 4: bit more targeted. We're doing one hundred and fifty to
Speaker 4: three hundred megawatt deals, hyperscal er adjacent in large tier
Speaker 4: one markets like Tokyo, London, South Paolo pre leased twelve
Speaker 4: to fifteen year terms with escalators, so we have probably
Speaker 4: shied away from some of the secondary and tertiary markets
Speaker 4: and stayed away from some of the frontier model type
Speaker 4: of opportunities too. We're a very large lender in the
Speaker 4: infrastructure debt space and you're seeing that rolling through our
Speaker 4: earnings as well in terms of the fundraising and deployment
Speaker 4: momentum there. So we are one of the largest institutional
Speaker 4: lenders to other developers and that's been a bright spot.
Speaker 3: Three.
Speaker 4: We have a large asset based finance business and we're
Speaker 4: squaring off with a lot of the banks on SRTs
Speaker 4: and portfolio purchases where we're helping them free up liquidity
Speaker 4: on their balance sheet to continue to deploy into the
Speaker 4: opportunit unity.
Speaker 3: And then for we have a.
Speaker 4: Very large infrastructure equity business where we're investing all around
Speaker 4: the digital ecosystem, transmission, fiber, battery, storage, etc. So we're
Speaker 4: kind of attacking it from all angles. But our view
Speaker 4: has been we want to be global, we want to
Speaker 4: be diversified, and we want to have the full capital structure.
Speaker 4: So that we can move around where we see best
Speaker 4: releatanive that.
Speaker 2: So the second word I want to dig into diversified,
Speaker 2: and I'm open to the reality check. I'm just going
Speaker 2: to say it feels it feels like a lot of
Speaker 2: people are in the same trait. They're an asset backed
Speaker 2: infrastructure debt on the credit side, and they're taking direct
Speaker 2: equity investments into say software and models. How do you
Speaker 2: avoid all the crowding that we're starting to see in
Speaker 2: other places.
Speaker 3: In digital, specifically with your firm. Yeah, I think the
Speaker 3: key in.
Speaker 4: This goes if you look at our earnings this quarter
Speaker 4: and you put the numbers up on the screen, what
Speaker 4: screams out to me is just the broad base nature
Speaker 4: of the business and the diversification. And so the way
Speaker 4: that we think about private market. We want to be
Speaker 4: up and down the capital structure debt to equity, so
Speaker 4: that we can move around and find real to value
Speaker 4: and response to rates or the economic environment. We want
Speaker 4: to be horizontally diversified across all the different private market
Speaker 4: asset classes, secondaries, private equity, real estate, infra, and you'll
Speaker 4: see investor appetite and our own view of real to
Speaker 4: value shift. And then within the funds, we want to
Speaker 4: be highly highly diversified. So if you look at our
Speaker 4: credit funds as an example, you may see nine hundred
Speaker 4: to one thousand line items. So we're not going to
Speaker 4: have any single exposure really drive the long term performance,
Speaker 4: and I think that's key.
Speaker 3: There is a risk in any investment.
Speaker 4: Business that you're over diversified, and I could argue maybe
Speaker 4: one thousand loans in one fund is overdiversified, but it
Speaker 4: served us well over the thirty years that we've been
Speaker 4: doing it.
Speaker 1: Earlier this year, everyone was saying there's going to be
Speaker 1: a complete collapse, that the private credit space is going
Speaker 1: to go down in flames because of the retail investors, etc.
Speaker 1: And your compatriots and yourself coming out and saying, WHOA,
Speaker 1: not at all. We're seeing actually performance hang in there
Speaker 1: and people are still interested. Where are we in that
Speaker 1: in terms of interest from investors in private credit? How
Speaker 1: much the pendulum has shifted to the infrastructure and some
Speaker 1: of the other plays instead.
Speaker 4: Yeah, Look, we've been pioneers in private credit and people
Speaker 4: have been saying it's a bad place to be for
Speaker 4: thirty years and it's grown pretty consistently and compounded at
Speaker 4: a very attractive ray of return. So anytime there's a
Speaker 4: narrative that's that loud, you've got to at least ask yourself,
Speaker 4: you know, what is it that they're looking at?
Speaker 3: We don't see it.
Speaker 4: If you look at our direct lending business, which is
Speaker 4: kind of where I think people are focused, are non
Speaker 4: accruals across the direct lending business right now are inside
Speaker 4: of two percent. That is well below the historical averages.
Speaker 4: Our cash flow growth is plus or minus ten percent,
Speaker 4: as I said, and that's been consistent. We are seeing
Speaker 4: healthy interest coverage, very low loans to value. So the
Speaker 4: fundamental performance is exactly what was underwritten. A lot of
Speaker 4: the noise, you know, I don't really know where it's
Speaker 4: coming from. It could be coming from a competitive set
Speaker 4: of capital that doesn't like to see the flows. It
Speaker 4: could be it could be software related. But there's nothing
Speaker 4: that we see in the portfolios that would indicate that
Speaker 4: credit's weakening. And the interesting is your question, and you
Speaker 4: see at this quarter in earnings, the institutional demand for
Speaker 4: private credit is probably accelerating right now because they're seeing
Speaker 4: spreads widening and they're seeing capital leave the market and
Speaker 4: feel like there's an opportunity to come in and take share.
Speaker 4: So our last two credit funds, both in asset based
Speaker 4: finance and Opportunistic Credit, hit their hard caps and we
Speaker 4: had to demand well and access for the hard caps,
Speaker 4: and we raise those funds quicker than any prior vintage.
Speaker 1: It's fascinating to hear you talk about the performance of
Speaker 1: these loans, and it's something that we've seen from the
Speaker 1: likes of Capital One and some of these other credit
Speaker 1: card companies. The credit performance is hanging in there. It's
Speaker 1: actually hanging in there better than people expected. Where are
Speaker 1: we in this economic cycle based on some of the
Speaker 1: activity that you're seeing in portfolio companies.
Speaker 4: Yeah, if anything, you could say growth is moderating slightly.
Speaker 4: So if we're growing cash flow portfolio wide nine to
Speaker 4: ten percent a year ago, that may have been eleven
Speaker 4: or twelve, but it's not negative. So you are slow growth.
Speaker 4: I mean, where are we? It's still early And back
Speaker 4: to the first question from Jonathan. You're seeing margin improvement,
Speaker 4: productivity gains, balance sheets are healthy, companies are delevered, so
Speaker 4: it feels pretty good and it's just not in corporate
Speaker 4: We see it in the real estate market too. We're
Speaker 4: well leased We're seeing rent increases and strong demands, so
Speaker 4: everything feels really good right now.
Speaker 1: We're talking about leverage coming out of the system. In
Speaker 1: public markets, there was some concern that maybe leverage was
Speaker 1: building or there was some fraudy types of behavior. In
Speaker 1: private asset management. You talk about one hundred and seventy
Speaker 1: billion dollars of dry powder. I'm just wondering how you
Speaker 1: see some of these structural dynamics in the market in
Speaker 1: terms of ability to finance some of the huge bills
Speaker 1: coming and willingness to you.
Speaker 4: So, yeah, look, I think one hundred and seventy billion
Speaker 4: of dry powder feels like a lot, but it's actually
Speaker 4: kind of in line with our annual deployment. So if
Speaker 4: you look the thirty six billion that we raised this quarter,
Speaker 4: we also deployed thirty six billion.
Speaker 3: That's actually a lot quicker.
Speaker 4: Than historical used to take us probably two to three
Speaker 4: years to deploy.
Speaker 3: Our dry powder. We're now almost on an annual raise and.
Speaker 4: Deploy I think with regard to the digital capex, obviously
Speaker 4: there's seven hundred and fifty plus billion dollars of capex
Speaker 4: demand coming from the hyperscalers. That is a large amount
Speaker 4: of capital it's beginning to quote unquote overwhelm the markets.
Speaker 4: And that's showing up in two ways. One, spreads are widening,
Speaker 4: which is not necessarily a bad thing, and people want
Speaker 4: to get paid more for the risk that they're taking.
Speaker 4: And it's probably slowing the pace of the built. So
Speaker 4: you know, when you're thinking about deployment, this is not
Speaker 4: happening overnight. These are two to four year projects. You've
Speaker 4: got energy constraints, you've got the engagement and civic.
Speaker 3: Discussions that have to go well. So there's a lot
Speaker 3: that's actually.
Speaker 4: Constraining the coming online of some of this capbec so,
Speaker 4: at least as we're sitting here today, those numbers don't
Speaker 4: concern me. But your your point is a good one.
Speaker 4: And going back to you know, a year ago, people
Speaker 4: were beginning to ask where's all this capital to come from?
Speaker 3: The CAPEX numbers have doubled.
Speaker 4: And the market is you know, is trying to keep pace,
Speaker 4: but it's going to be a little bit of a constraint.
Speaker 2: I think I thought you were about to ask whether
Speaker 2: Leopold had given Micah coole when you talked about a
Speaker 2: dry powder.
Speaker 1: Maybe, I mean, maybe you were the one that was
Speaker 1: the grim reaper calling, did you care some?
Speaker 3: I love those quotes.
Speaker 2: Did he give you a quo?
Speaker 3: Breaking news? And we've got to.
Speaker 2: Get any lessons from that as you see that story.
Speaker 3: I don't know. I don't know enough to know.
Speaker 4: I think, if anything, maybe back to your prior question
Speaker 4: is be diversified number one, which is, you know, don't
Speaker 4: be fully exposed to one one factor or single correlation.
Speaker 4: I think that's you know, that that might be the lesson.
Speaker 4: It might be that experience matters, and that you know, uh,
Speaker 4: combination of smarts and experience through cycles is ultimately important.
Speaker 4: And I think, you know, I think about our own
Speaker 4: thirty year journey and all the lessons that we've learned
Speaker 4: navigating cycles and kindful want things, and you'll learn lessons
Speaker 4: the hard way, and so that that that might be
Speaker 4: the moral of the story too.
Speaker 2: Mike appreciate it. Thank you, Thank you, buddy, Thanks for jak.
Speaker 2: Thank you very much. Michael gets you there the are
Speaker 2: c e O