Heat.
What they're listening to is how well-hedged a lot of these private markets companies are to this AI revolution that we're doing.
Please welcome to the stage Michael Arougheti, co-founder and CEO of Ares Management Corporation for a conversation with member Stanny Burgerer.
Thank you everyone for joining this conversation. I'm very thrilled to have you, Mike. Thank you for sitting down with me today. What a time to be having this conversation. I mean, private credit is dominating the headlines, and if it's not that, it's other forms of volatility, be it concern about disruption of AI, and now the latest one we have to grapple with is the prospect of war and geopolitical uncertainty. Has that changed any of your assumptions for how 2026 plays out?
As surprising as this may sound, not really. And the reason being, as a private markets manager, we're thinking in 5, 10, 15-year increments. And you and I have had this conversation before. It's actually an interesting place to live as a publicly traded company that can experience the day-to-day volatility in markets and has to react at least emotionally to the daily headlines. But when we're making investments behind secular themes like realigned supply chains globally, the re-industrialization of the US economy, digital infrastructure and digitization, these are not things that get knocked off track by the things that we tend to talk about day-to-day. So inevitably, the world that we're living in may change geopolitically. We may see realignment of alliances. Energy prices has a big impact. We may see inflation come back in. So that's going to have an impact on certain things that we own, and we will react. But one of the nice things about being a long-term investor in the private markets is we don't really have to say, okay, the playbook that we had put in place for ourselves is now fundamentally changed.
Have you started to think at all, again early days, but of resurgence of inflation? If the Fed isn't able to cut as much as we assumed, how would that change things for you?
Well, it's interesting because part of this private credit story, as an example, and I saw it on the walk up, the way that most large private credit managers are set up is that we're kind of hedged against outcomes. So, if software disrupts a sector of our portfolio, then our digital infrastructure and data center development business benefits. If software disrupts the portfolio, then our renewable energy business benefits. So when we think about inflation, what's interesting, the private credit narrative is also around base rates coming down. So there is this anxiety that crept into the market that as base rates were coming down, the return available in private credit would somehow become less attractive. If we find ourselves in an environment where we still have inflation and rates are elevated, that's actually theoretically good for total returns in private credit. So, I think you have to start thinking about both sides of every coin. And most of the things that we tend to talk about on a day-to-day basis have a risk and an opportunity associated with them. And when you look at a broad-based manager like Ares, we tend to be on either side. And so, we tend not to get that worked up about any.
Just hearing you talk about that though, let's take the software AI example. Not every platform has the size and scale to balance out a software exposure with AI infrastructure. So these pains we're seeing, if you can benefit by being diversified, what happens if you aren't? Is there a shakeout to come in this industry?
I think, investing 101, and Mark Rowan just talked about it too, diversification is a big way to mitigate risk. It's also a way to dampen return if you focus too much on diversification. So, we're constantly trying to find that right balance of making sure that we can capitalize on volatility. And one of the ways you do that is you understand deeply what you own so that when the markets get dislocated or disrupted, you can push in and play offense. Inevitably, if you are concentrated, whether it's AI or we saw it in the energy shakeout five, six years ago, there are going to be winners and losers. Generally speaking, those that are more diversified will survive, consolidate, and probably grow disproportionately.
We've already started to see some consolidation. I have to say, I feel like you and I have been talking about consolidation for years. Does it feel at all that it's reaching a head at this moment? That you really are starting to see some funds that are limping along and their only odds of survival are to become bigger and join a larger platform?
So, we've been talking about consolidation for over a decade. And back to secular themes driving the growth in private markets and capital formation is consolidation. So, unlike investing in the public markets, size is not the enemy of performance in the private markets. It's quite the opposite because the larger you get, the more resources you have, the more you can invest in local origination, product development, large balance sheet, the more relevant you are to customers, the more relevant you are to global investors. So size is not something that we necessarily pursue as an end goal. But what we're all experiencing is that the larger we get, the better our performance is. Consolidation is not about limping along and getting subsumed. There's been some of that, right? We acquired Ares and Allied and other public companies coming out of the GFC, but it's more the high-quality monolines. So to your earlier question about lack of concentration, if you're an infra-only equity manager or you're a single geography private equity manager, but you have a 25-year institutional track record and a legacy that you want to sustain, you will try to get consolidated from a position of strength, not a position of weakness. That being said, if we continue to see the type of volatility that we're seeing now, I do think that you'll see some of these weaker players get consolidated out.
What does that look like if you are not specialized, but you're still one of these kind of middle-sized players? Are they going to see a real squeeze right now?
I think so. I think so. The global LPs are looking to allocate more dollars with fewer managers. And they want to do that because they want better economics. They want better access. They want better information and analytics. And I think they're also seeing that scale drives performance. And so as this consolidation happens, you're going to see the large get larger. You're going to see niche, real alpha-generative managers continue to thrive. And then I think everyone in the middle is going to have to really prove that they can generate alpha. They're going to get squeezed. By the way, just to point out, because I don't think you can do it, or perhaps you're too humble to do it. Last year, you raised two of the largest ever funds, 30 billion and 35 billion in direct lending. And that feels like evidence of its very self of the big getting bigger. So, in a winner-take-all environment or winner-take-most, five years from now, what is going to be the size of this industry in terms of number of platforms? Are we talking there's just five to 10 players? Is there more than that?
Yeah, I don't know. If you look, you have to look for an analog, and generally speaking in financial services, players can max out at a 25% market share and then you get diversification below that. So you can look at the banking industry where you have six or seven large platforms. You can look at the insurance industry and you can see that consolidation too. So I don't know if it's five or 10, but it's going to be a handful. To your point though on the capital formation, last year we raised about $15 billion, which sounds like a big number, in the grand scheme of the markets and where we were 5 or 10 years ago, we actually put 145 billion to work. So as you're consolidating capital, you're also consolidating the ability to deploy that capital, and so that's part of what compounds this market leadership. So how are you thinking about the Ares platform specifically as this trend unfolds? As it makes sense to have scale, are you looking at growing not just organically but inorganically as well?
Yeah, our history of growth has been a healthy combination of organic and inorganic. About 75 to 80% of our growth historically has been organic, 20 to 25 inorganic. We tend to lean into an acquisition when we see a market that is going through some kind of transformational change or secular shift where we think we have a right to participate and win, but we just don't have enough scale or we're missing a key piece of information edge or we don't have the right distribution. And so when you look at where we're acquiring, other than small tuck-ins that we'll do, it's going to be in big, transforming markets like data center development or wealth distribution. Most of those boxes, frankly, are checked for us right now. And so most of the growth, I think, for the foreseeable future will be organic, leveraging the competitive advantages that we have on the distribution and investment side to grow within the business. But there are still a couple of things that I think would make sense for us.
Well, part of the thing, and actually let me get to that first. What would be those couple of things that make sense for you?
Yeah, we've been public about this. I think getting larger in private equity could make sense for us. We've been in the private equity business for as long as we've been in existence, but it just hasn't kept pace with the rest of the business in terms of real estate, infra, and credit. I think there's an argument that someone of our size and global reach should be larger generally in private equity.
I mean, there's a lot of players out there and probably a lot of smaller players who would love to be part of the Ares platform. How do you evaluate that when you look for potential managers to buy? What are the characteristics of a good private equity bolt-on?
I just realized now my phone is going to be ringing all day from every investor.
Everyone's going to be pushing you for sure.
Look, it's all about track record. And this is something that people don't talk about enough. And so I'm going to answer your question a little bit differently because when you get into a world that we're living in now where you're seeing outflows and volatility in stock prices, it all comes down to fundamental performance and top-quartile, top-decile performers that can demonstrate that they can deliver outsized return in any environment grow. So we have a simple saying in Ares that assets follow performance. If you perform, you grow, and if you do well for your investors, they do well by you. So particularly in markets like private equity, and frankly when you get into the equity part of the capital structure even in real assets, performance is kind of the top criteria. And then I think it's about can you really generate alpha, and this is going to be the big shakeout in PE. We're coming off of a decade where you had a lot of beta players who, because of the rate environment that we were in and because of the nature of supply-demand in the market, were generating what looked to be best-in-class returns. And now that arbitrage is gone and you really have to, you're going to get an opportunity to see which private equity managers can really make companies better and transform them, and I think those are the ones that you would want to own.
