WEBVTT - Ares Management Co-Founder, CEO & President Michael Arougheti Talks Private Equity

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

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<v Speaker 2>The Bloomberg invest Summit currently underway in New York City.

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<v Speaker 2>Earlier Bloomberg Shanali Bask sat down with Areas Management co founder,

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<v Speaker 2>CEO and president Michael Aarraghetti. Here is some of their conversation.

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<v Speaker 3>How exciting is for you the private equity versus private

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<v Speaker 3>credit opportunity these days?

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<v Speaker 1>I don't It's fine.

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<v Speaker 4>I view it all as one spectrum, and I think

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<v Speaker 4>this is why maybe private credit is.

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<v Speaker 1>Growing and getting the attention that it is.

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<v Speaker 4>Any asset that we invest in, whether it's a company

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<v Speaker 4>or a piece of real estate, has an unlevered free

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<v Speaker 4>cash flow associated with it. And as the markets evolve

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<v Speaker 4>and we innovate, it's really just a question of where

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<v Speaker 4>do you want to attach to that asset. And in

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<v Speaker 4>most markets, at the very early stage, sports being one,

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<v Speaker 4>as Josh Jason, we're just talking.

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<v Speaker 1>About capital structures.

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<v Speaker 4>Capital structures are pretty simplistic, right banks equity or banks

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<v Speaker 4>high net worth individuals. And as the markets grow and evolve,

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<v Speaker 4>we all get quite creative and innovative of trying to

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<v Speaker 4>figure out where where we want to attach. And so,

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<v Speaker 4>you know, private credit growth in private credit is in

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<v Speaker 4>fact an extension of people's positive experience in private equity.

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<v Speaker 4>We're able to go deeper into some of these assets

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<v Speaker 4>at higher rates of return with more creative structures. But

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<v Speaker 4>we have capped upside in a lot of these right,

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<v Speaker 4>So in some of our opportunity to credit mandates, we're

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<v Speaker 4>actually creating debt like instruments that have equity upside. But

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<v Speaker 4>private equity is critically important for the investor community because

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<v Speaker 4>it is the only place where you can go get

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<v Speaker 4>two to three times your money. So private credit durable,

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<v Speaker 4>high current yield, performs through most market cycles, but at

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<v Speaker 4>the end of the day, your return is going to

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<v Speaker 4>be pretty range bound if.

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<v Speaker 3>Not camp Now, it was interesting a day ago we

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<v Speaker 3>had a boatload of debate on this stage about private credity,

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<v Speaker 3>credit risks, opportunities, cracks in the market.

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<v Speaker 1>So let's hear it from you. Where do you believe

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<v Speaker 1>cracks are, if there are any. We're not seeing a

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<v Speaker 1>lot of cracks.

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<v Speaker 4>You know, I've been in the private credit market for

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<v Speaker 4>almost thirty years, and there's a constant and consistent narrative

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<v Speaker 4>that there's risk being taken in private credit that somehow

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<v Speaker 4>is going to you know, topple the economy or create

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<v Speaker 4>systemic issues. Back to my earlier comment, people need to

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<v Speaker 4>appreciate most private credit instruments that we're all talking about

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<v Speaker 4>or backed by some form of institutional equity ownership, and

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<v Speaker 4>most private credit instruments are levered fifty to sixty percent

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<v Speaker 4>of enterprise value. So if people are really anxious about

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<v Speaker 4>losses industry wide and private credit, you're blowing through trillions

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<v Speaker 4>of dollars of value in the institutional private equity real

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<v Speaker 4>estate and infrastructure market. So people need to zoom out

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<v Speaker 4>and kind of understand again where these these loans sit,

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<v Speaker 4>who they're supporting, and the types of types of investments.

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<v Speaker 1>That's one. Two.

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<v Speaker 4>You know, we have close to four thousand middle market

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<v Speaker 4>investments at areas and the credit performance has been incredibly strong.

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<v Speaker 4>You know, default rates are low, interest coverage is healthy.

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<v Speaker 4>Ebitdas growing in the you know, low double digit range.

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<v Speaker 4>So yeah, we feel pretty good about it. I think

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<v Speaker 4>it's all a little overblown, to be honest.

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<v Speaker 3>So another part of the market that I did not

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<v Speaker 3>get to ask some of our guests about yesterday that

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<v Speaker 3>you do very much operate and is real estate. How

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<v Speaker 3>much stress is there still in that market right now.

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<v Speaker 4>Well, there's more stress there than there is in the

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<v Speaker 4>corporate market. I think for maybe obvious reasons. One, the

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<v Speaker 4>asset class runs more leveraged, so it's a little bit

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<v Speaker 4>more rate sensitive to the maturity wall issue in real

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<v Speaker 4>estate is probably more acute than in corporate, the reason

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<v Speaker 4>being there are just fewer levers to pull to effectively

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<v Speaker 4>restructure or rehabilitate a piece of real estate. So when

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<v Speaker 4>you think about maturity wall or even modestly underperforming corporate investments,

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<v Speaker 4>you have levers to pull both on the balance sheet

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<v Speaker 4>and the income statement to try.

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<v Speaker 1>To grow through it. You own a building, it's least

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<v Speaker 1>or it's not least.

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<v Speaker 4>The rent you know, covers your debt service or a doesn't,

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<v Speaker 4>and that's basically it. So the math of the asset

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<v Speaker 4>class clearly sets up just for more cute stress. That said,

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<v Speaker 4>when you when you put office in certain markets off

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<v Speaker 4>to the side, we are still seeing pockets of strength

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<v Speaker 4>in multifamily and industrial, which is where we're largely invested.

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<v Speaker 4>So I think that story will still play out, but

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<v Speaker 4>I don't think it's going to be a big systemic story.

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<v Speaker 4>I think it's going to be one that kind of

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<v Speaker 4>grinds its way out over time.

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<v Speaker 3>Whether it's the corporate market that might look to refinance

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<v Speaker 3>or really restructure to kind of stave off the higher

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<v Speaker 3>interest rate environment, or if it's real estate where you're

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<v Speaker 3>seeing private market values really start to.

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<v Speaker 1>Bottom.

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<v Speaker 3>In some people's perspective, how much money do you put

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<v Speaker 3>to work? How big of an opportunity.

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<v Speaker 4>As a private market investor, You can't. You can't try

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<v Speaker 4>to perfectly time markets. That's the good news and the

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<v Speaker 4>bad news. You have to be directionally accurate. We get

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<v Speaker 4>the luxury of not having to pay attention to all

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<v Speaker 4>of the headline, you know, and volatility.

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<v Speaker 1>That that can induce.

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<v Speaker 4>But the best time to invest, both corporate and real

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<v Speaker 4>assets is when you're when you think you're coming out

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<v Speaker 4>of a cycle. So in real estate in particular, this

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<v Speaker 4>is a great time to be forming capital, planting seeds

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<v Speaker 4>because you want to get out ahead of it. And

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<v Speaker 4>that's our experience, you know, in multiple cycles. So you know,

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<v Speaker 4>it's a pretty good deployment environment. Like I said, we

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<v Speaker 4>are seeing the pipelines pick up, which is encouraging.

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<v Speaker 3>You know, it's interesting in addition to just deploying for

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<v Speaker 3>your funds, we've reported here at Bloomberg that you're also

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<v Speaker 3>considering one of the largest private asset manager deals of

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<v Speaker 3>all time, or at least you've seen in recent years

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<v Speaker 3>in the.

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<v Speaker 1>Real estate world.

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<v Speaker 3>What can you say about your M and A ambitions

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<v Speaker 3>of your own, Well.

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<v Speaker 4>Not to speak about rumors specifically. We've been quite acquisitive,

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<v Speaker 4>as you know. So if you look at our growth,

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<v Speaker 4>twenty percent of our growth over time has come from some.

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<v Speaker 1>Kind of M and A.

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<v Speaker 4>I have a very strong view that these markets will

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<v Speaker 4>continue to consolidate.

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<v Speaker 1>And the reason that they're going to consolidate is from.

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<v Speaker 4>The manager's perspective, there's huge benefit to scale. The larger

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<v Speaker 4>we get, the more people we can have, The more

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<v Speaker 4>people we have, the more deals we can do, the

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<v Speaker 4>more deals we do, the more information we get. The

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<v Speaker 4>better information we get, the better our investment performance, and

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<v Speaker 4>then we get more aum and so there's this virtuous

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<v Speaker 4>circle and cycle that scale creates in private markets.

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<v Speaker 1>And people are beginning to see that.

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<v Speaker 4>Investors are putting more of their dollars with fewer managers

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<v Speaker 4>because they see that opportunity for out performance and they

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<v Speaker 4>also see a huge efficiency. So most large institutional investors

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<v Speaker 4>you talk to will tell you that they're shrinking their

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<v Speaker 4>investor roster from call it one hundred to maybe twenty

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<v Speaker 4>managers to try to drive efficiency and deeper partnership. And

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<v Speaker 4>the markets are global and globalizing, so a lot of

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<v Speaker 4>the things that we learned, let's say over our twenty

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<v Speaker 4>five years here, we can now apply into developing markets

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<v Speaker 4>like Europe or Asia that are earlier on in their

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<v Speaker 4>maturity curve. So we will continue to be at the

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<v Speaker 4>forefront on the consolidation. We want to be a consolidate tour,

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<v Speaker 4>not a consolidate tea. I think we have a really

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<v Speaker 4>good track record of buying companies financially accreative, strategically accreative,

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<v Speaker 4>and obviously driving culture, which.

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<v Speaker 1>I think is important.

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<v Speaker 4>But we're not alone, so I would expect to see

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<v Speaker 4>a lot of a lot of activity

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<v Speaker 2>Aeries Management co founder, CEO and President Michael Araghetti speaking

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<v Speaker 2>with Bloomberg Shanali bask from the Bloomberg invest Summit in

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<v Speaker 2>New York City.