Ares CEO Mike Arougheti on Private Capital, Market Stability and the New Economy

Sure, I'll be quick because I don't know that there are things that haven't been said, but one of the drivers of the new economy is actually private credit. I think the growth in the private credit market reflects structural changes in the way that companies access capital that has actually been quite innovative and transformational. So, if you look at—hopefully we'll talk a little bit about what's happening in digital infrastructure—but the traditional capital markets right now are not actually able to meet the capital demands of the digital transformation that's happening today, and the private markets, both private credit and private equity, are actually filling that void. So, if you look at what's happened in the private credit market globally, you've begun to see a more natural matching of investor capital and the needs of people who want to access the capital markets either because of duration or cost of capital or creativity around structure. So, I think first and foremost, you can't talk about private credit without really understanding why it exists, the role it's played in global growth and innovation. There is anxiety in the market, which for the life of me I still do not understand. Ares has been a leader in the private credit market for 30 years. We've invested over $200 billion in over 2,000 middle-market companies. Our return on that portfolio has been about 11% compound annually with a loss rate approaching zero. So, I only say that not to tout our bona fides, but to say we come to this moment in time with a lot of experience and a lot of perspective about how companies and markets perform through cycles. And having gone through long-term capital in the Asian crisis, and having gone through the dot-com and GFC and COVID and multiple taper tantrums and wars, there's nothing that we see in the private credit market that looks risky relative to prior vintages. In fact, I think the quality of the companies that are accessing the private markets are significantly larger, higher quality, and more institutional than in prior cycles. The market is deeper, it's more liquid, there are more avenues for capital to move around. And what's so interesting about the market is it is not leveraged. And I think that's something that people don't understand because there's even been fears of systemic risk poking into this conversation about private credit. If you look at all prior cycles, they've largely been driven by leverage in the system, seen or unseen, and then an asset-liability mismatch that unravels that leverage. And banks are leveraged 10 to 15 to 1, insurance companies are leveraged, there's certain segments of the structured credit market. Those are the places you need to look when you think about systemic risk. The private markets, by design and by structure, are unlevered.

And to the extent that they take on leverage, that leverage is fairly de minimis, and it's matched to the duration of the asset and so there really is no structural opportunity for a run on the bank or any kind of unwind there. So I think part of this is just a continuing need for people to see the asset class play out through cycles and get a deeper understanding. And then the last thing I'll say on that to harp on private credit too much. I think there's a misunderstanding too as to how private credit interacts with the institutional private equity market.

And private credit is not just private equity. It's lending to real estate. It's lending to infrastructure. It's lending to the consumer economy. And when you view it through that lens, what you really begin to see is that private credit is typically being used by institutional equity owners. And if you were to look at the risk that's being taken in the private credit markets, it's typically at the upper 50% or less of a company's enterprise value or an asset's value. So it's very hard to have a conversation about risk in private credit without talking about broader economic risk and broader risk in the equity markets, which I think is something that people need to get a little bit more focused on.

Yeah, we talk a lot about the new economy in terms of geopolitical and economic shifts, macro and then micro shifts as well. And if you think about geopolitics and the world that we're living in today, there's a big movement towards deglobalization. That's showing up in lots of pockets of what we do. People are reordering their global supply chains to either talk about nearshoring or friendshoring or redundancy. That has us thinking very hard and rigorously about where we want to invest in industrial logistics and what that looks like and that's probably our highest conviction area of investment. It has countries reindustrializing. And so as they're pulling their supply chains closer to home, they're also thinking about how do I build domestic manufacturing particularly in critical industries.

And so that has implication on where you're investing in the industrial economy. In places like Europe in today's world, you have a remilitarization of those economies and that has a lot of implications for how you invest around those corners of the economy. So I think that it's not just real estate. I think you have to think about it's real estate, infrastructure, and then the products and services that surround those shifts. When we think about the infrastructure side of it, it's really the digitization of everything. And while there's a lot of conversation now happening about AI and AI transformation and disruption, we at Ares are thinking yes about that, but also what does the piping and plumbing need to look like in order to support that type of transformation.

Yeah, I think you have the data centers is obviously the hub around which we're building the infrastructure, but the conversation about digitization of everything is not just the data center, it's the technology in the data center, it's the chip technology, it's the cooling systems, it's battery storage, it's novel and innovative power sources on site, it's transmission. So you have to like all things start to really look at the world through the lens of these ecosystems to understand how the growth in the data center business and the growth in AI is going to drive other parts of the infrastructure opportunity.