There's a retail revolution underway in private markets. Traditional fundraising has slowed, putting more focus on wealthy individual investors. Ares has been at the forefront of this trend, offering alts to retail for two decades. CEO Michael Arougheti sat down with us to discuss the growing popularity and whether it leads to growing risks. This is Inside Alt.
So, you just announced that you're increasing your AUM targets, which were already large, 750 billion by 2028. That's what you said last year, and now you're upping that by about $25 billion. What are the key drivers of increasing your targets, especially against this backdrop that we know has been a little difficult from a fundraising standpoint for the industry?
Yeah, look, I think the good news is Ares is growing broadly across each of our segments and distribution channels. This specific revision is largely just driven by what we're seeing in the wealth management channel. Huge momentum, broad product set, and just as we sit here today, the pace of growth there just has us already confident that we're going to exceed the initial target.
So, that is really fascinating because you already have AUM across eight semi-liquid products that crossed 50 billion recently. So, 25 billion on top of that and on top of what you've already announced. So you've been in this space for several decades largely through BDCs, now different types of semi-liquid vehicles. How do you see the evolution going and what do you think is the key contributor to all of this momentum that's leading to up these targets?
Obviously wealth is getting a significant amount of attention now just given the growth in demand coming out of that channel. I think the growth we're seeing is a confluence of a couple of factors. One is it's buying from the financial advisor community understanding that alts have a meaningful role to play in their clients' portfolios. It's a recognition by folks like Ares that this is an underserved customer set and that granting access to these types of products is valuable to us for growth but also valuable to the client requires a huge investment. So we've been in the retail alt space for over 20 years. As you mentioned, ARCC, you know, we launched in 2004.
That was before your IPO at Ares.
Fascinating. Invested in that.
Fascinating. But what's changed is now the quality of the product, the scale of the product, the investment that we've made in servicing the product. So we have about 185 people globally in 10 offices that are constantly working on product development, product servicing, advisor education and client education. And I think that educational piece is a huge part of the growth story here. It's this demystification of alts and private markets investing for the end user.
Can you explain what that value proposition is? Because it's not like a, you know, 60/40 portfolio of liquid assets has done horribly, especially if you're more tilted toward equities recently. So, what exactly is it that you feel like investors can't get from a traditional portfolio of stocks and bonds that they need to add alternative assets to that portfolio?
I think it's a combination of access and then outcomes. So just if you think about access, it's very difficult to access most corners of the alternative space in public form. And when we talk about alternatives broadly, you're talking about private real estate, private infrastructure, structured finance, private credit, and all things in between. There's just no logical entry point for the mass affluent or high net worth investor to really get that in the public markets. That's number one. Number two, when you look at the structure of the public markets, right? So, if you take the public equity markets, there are 4,500 give or take publicly traded companies. The market cap in the public equity markets is highly concentrated in the top 10 companies. And so, while there's access and liquidity and return, it's actually pretty difficult to navigate a diversified portfolio in the public markets. So I think when people start shifting to privates, they're looking for a couple of different things. We see a real hunger for durable yield and income, particularly given the aging demographic. And so things like private credit or yield oriented real estate product really resonates. I think they're looking for diversified and non-correlated equity exposure. So private equity, real estate equity, etc. And there's a lot of tax advantage structurings that you can get in the private market that don't exist in the public market as well. So I think in this conversation it's not private replacing public. It's really just private becoming a more meaningful portion of a client's investable assets.
Yeah. No, it sounds like the diversification element is really important too, just as you mentioned the disappearing public markets as some have alluded to and kind of generating that through the diversification that you get with the many many more private companies that are out there. In terms of competition, wealth is Ares isn't the only firm that has kind of caught on to and is growing their wealth business. There are a lot of them out there. What do you see as kind of the overall impact of that? And I asked that against the backdrop of concerns surrounding, you know, maybe some bad behavior, putting poor performing assets into the wealth products and reserving them essentially for retail which may not pay as close of attention. Are you concerned that everybody has gotten on this wealth train both from a competitive standpoint and from a reputation standpoint?
No. I think the reason it's growing now is you have the highest quality largest global managers bringing institutional quality and institutional adjacent product into this market in a way that they hadn't before. So this narrative of weaker product being reserved for retail is just not true. I do think that there are appropriate concerns that anytime you're bringing product to the retail investor or the individual investor it comes with different risk from a regulatory perspective and so theoretically if there's underperformance in the channel it may have a higher impact than if you underperform in the institutional market but I think that's more of just a what does it mean for investor appetite as opposed to challenging the long-term growth opportunity in the private markets. A lot of people are looking at this opportunity set right now but it's very difficult to access because like every other corner of private markets wealth is moving to scale. So if you actually look at who's raising capital, it's the large platforms that are global that are multi-asset that can make the investment in product development, seeding products, origination and portfolio management to deliver the product and then the wholesaling and service infrastructure. And when you actually go through the math, what you're going to find is unless you have confidence that you're going to get to 10 plus billion dollars, it's a really difficult investment to make. So, not surprisingly, in very short order, we've seen a very high concentration of assets raised and assets deployed in the hands of the top 10, and I'd expect that to continue.
So, how does it work deciding what goes into an institutional portfolio versus what goes into a retail and wealth portfolio? How do you dispel that criticism that, you know, basically the liquid underperforming stuff is going to go to retail and all the good stuff?
I don't know how other firms do it, but the way that Ares manages it is that we actually allocate our investments based on available capital. And so a lot of the investments that are finding their way into our institutional client portfolios are also finding their way into our wealth product. And so they're growing together. That has always been a cornerstone of how we've approached the growth opportunity here. And if you look at the dollars raised, we're always marrying our wealth product with what we would call a core flagship institutional product. And the reason for that is one of the challenges in growth and wealth is it's just more pro-cyclical than the institutional market. Meaning when you get a dollar, you have to invest the dollar. Whereas when you manage institutional money and draw down funds, you can actually opt out of a market and you give that opportunity set away when you grow in wealth. So our early learnings have been that if you really want to grow well through the cycle and deliver durable performance, you have to have the dry powder and the flexibility that comes with the institutional fund and marry it with growth and wealth.
That seems easier to do with private credit or direct lending than it would be with private equity. Is that right or is it about the same?
I think it's the same. The way that we've approached private equity to date is our wealth product is more geared towards the secondary market. And again if you think about what the high net worth client or the retail client is looking for they get high diversification and no J-curve issue by investing in highly diversified secondaries portfolios. And so while that tends to give up a little bit of that asymmetric upside that you get investing directly in private equity it's giving the end client what they want.
Yeah. Past the point of the trough in the J.
Once you get in there. What about 401ks? You know, when we talk about retail in this context we're talking about high net worth individuals typically those who are finding their way to Ares through a financial adviser but there's been an executive order surrounding 401ks urging the government to look into those and to see if they're an appropriate part of a retirement portfolio. How do you feel about that?
I think it's fantastic and again putting aside the current conversation or light that's being shined on DCs, retirement portfolios already have meaningful exposure to private. So in a world of defined benefit the largest pension plans on the planet all have meaningful exposure to alts. So, it would make sense that if it's good for the investor and the plan participant to own it in a DB plan, then they should own it in a DC plan, right? That makes perfect sense to me. And I think it's more just again about continued access to investment outcomes that are differentiated. That being said, we have a long way to go before that becomes a reality. To go from an executive order to actually having scaled product in this market. I think there's a lot that needs to happen. You need to see rulemaking. You need to potentially see a change in law. You need to see those two things then lead to an increased tolerance for risk on the part of plan sponsors. And then you need to see the entire alts ecosystem coalesce around this distribution channel as an area for growth. I think all of that eventually will happen, but I think it's years away, not months away. The other thing that we try to stay focused on is it's not an either-or. It's not DC opens up to alts or not and it affects our business. The reality is it just diversifies our distribution opportunity. I think we're going to hit our growth targets whether DC opens up to alts or not. You would just see a different allocation of those investments into the different segments.
Interesting. So when we talk about the increase in your targets by 2028, that additional 25 billion from wealth, that does not even account for the potential opening up of 401ks and that would just be upside for essentially what in terms of the regulatory changes that are needed. I know a lot of people have thrown out the litigation risk issue and this idea that if a 401k plan sponsor is paying high fees for something and it doesn't deliver they open themselves as a fiduciary to certain litigation risks. Do you see that regulation...
That is the biggest issue and that's where the regulatory change would need to happen. It could come through Department of Labor pronouncements and rulemaking which would have some impact but I don't actually think that you'll see change behavior until there's a change in regulation. And the challenge with that sector which is almost to the disadvantage of the end client is it's very very fees sensitive and the narrow definition of fiduciary duty is cost not what is my unit of return delivered for that cost. And so almost by definition structurally the market is not geared to alts where fees are higher but you pay for a much higher net return. So until you give the plan sponsors that comfort that they're free of litigation risk for having not pursued their fiduciary duty I think it's going to be hard.
