Ares Management CEO & Co-Founder Mike Arougheti Talks Record Earnings

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Good to see you. Good morning. Good morning. I wanted to start with a quote of yours from earlier this year when things were pretty difficult with the software issue. And you said something really important. You said the following. If you're going to underwrite a narrative of AI disruption, you also then have to say, well, what does that mean for the productivity and margin improvement for the rest of your book? I think that's a good place to start. Where are you seeing value being created right now? It's, I'm glad I said that. So if you, if you look at the way that Aries is playing, the AI transformation, it's what are we doing within the data center and digital infrastructure space? What are we doing within our portfolio companies and what's that productivity uplift? And then what are we doing within Aries proper to either improve our investment outcomes or profitability? So if you start with Aries first, we're obviously deploying AI across the entire enterprise. We're seeing significant efficiency. We had 100 basis point margin increase in the quarter year over year. And we've guided the street to expect zero to 150 basis points per annum. A fair amount of that is technology efficiency that's getting created, re-underwriting processes, re-underwriting systems, and we are seeing uplift. That is also translating into increased productivity and margin expansion within the portfolios. So if you were to look across our private equity portfolios, our private credit portfolios, cashflow growth is still plus or minus 10%. If you look at corporate earnings, I think you're going to see that that's generally the theme. And then within the investment space, we are doing our best to stay diversified in the way that we're attacking the digital infrastructure opportunity. Big investors in data center development, but I think our approach has tended to be a little bit more targeted. We're doing 150 to 300 megawatt deals, hyperscaler adjacent in large tier one markets like Tokyo, London, Sao Paolo, pre-leased. We're doing 150 to 300 megawatt deals in large tier one markets like Tokyo, London, Sao Paolo, pre-leased. 12 to 15 year terms with escalators. So we have probably shied away from some of the secondary and tertiary markets and stayed away from some of the frontier model type of opportunities. Two, we're a very large lender in the infrastructure debt space. And you're seeing that rolling through our earnings as well in terms of the fundraising and deployment momentum there. So we are one of the largest institutional lenders to other developers and that's been a bright spot. Three, we have a large asset-based finance business and we're squaring off with a lot of the banks on SRTs and portfolio purchases where we're helping them free up liquidity on their balance sheet to continue to deploy into the opportunity. And then four, we have a very large infrastructure equity business where we're investing all around the digital ecosystem, transmission, fiber, battery storage, et cetera. So we're kind of attacking it from all angles. But our view has been we want to be global. We want to be diversified. And we want to have the full capital structure so that we can move around where we see best relative value. It's the second word I want to dig into, diversified. And I'm open to the reality check. I'm just going to say it feels. It feels like a lot of people are in the same trade. They're in asset-backed infrastructure debt on the credit side. And they're taking direct equity investments into, say, software and models. How do you avoid all the crowding that we're starting to see in other places? In digital specifically? Within your firm. Yeah, I think the key-- and this goes-- if you look at our earnings this quarter, and you put the numbers up on the screen, what screams out to me is just the broad-based nature of the business and the diversification. And so the way that we think about private markets is we want to be up and down the capital structure, debt to equity, so that we can move around and find relative value in response to rates or the economic environment. We want to be horizontally diversified across all the different private market asset classes-- secondaries, private equity, real estate, infra. And you'll see investor appetite and our own view of relative value shift. And then within the funds, we want to be highly, highly diversified. So if you look at our credit funds as an example, you may see 900 to 1,000 line items. So we're not going to have any single exposure really drive the long-term performance. And I think that's key. There is a risk in any investment business that you're over-diversified. And I could argue maybe 1,000 loans in one fund is over-diversified, but it's served us well over the 30 years that we've been doing it. NICOLE SINCLAIR: Earlier this year, everyone was saying there's going to be a complete collapse, that the private credit space is going to go down in flames because of the retail investors, et cetera. And your compatriots and yourself are coming out and saying, whoa, not at all. We're seeing, actually, performance hang in there, and people are still interested. Where are we in that, in terms of interest from investors in private credit? How much the pendulum has shifted to the infrastructure and some of the other plays instead? DAVID LEVIN: We've been pioneers in private credit, and people have been saying it's-- it's a bad place to be for 30 years, and it's grown pretty consistently and compounded at a very attractive rate of return. So anytime there's a narrative that's that loud, you've got to at least ask yourself, what is it that they're looking at? We don't see it. If you look at our direct lending business, which is kind of where I think people are focused, our non-accruals across the direct lending business right now are inside of 2%. That is well below the historical averages. Our cash flow growth is-- is plus or minus 10%, as I said, and that's been consistent. We are seeing healthy interest coverage, very low loans to value. So the fundamental performance is exactly what was underwritten. A lot of the noise, I don't really know where it's coming from. It could be coming from a competitive set of capital that doesn't like to see the flows. It could be software related. But there's nothing that we see in the portfolios that would indicate that that credit's weakening. And the interesting thing to your question-- and you see it this quarter in earnings-- the institutional demand for private credit is probably accelerating right now because they're seeing spreads widening and they're seeing capital leave the market and feel like there's an opportunity to come in and take share. So our last two credit funds, both in asset-based finance and opportunistic credit, hit their hard caps. And we had demand well in excess for the hard caps. And we raised those funds quicker than any prior vintage. It's fascinating to hear you talk about the performance of these loans. And it's something that we've seen from the likes of Capital One and some of these other credit card companies. The credit performance is hanging in there. It's actually hanging in there better than people expected. Where are we in this economic cycle based on some of the activity that you're seeing in portfolio companies? Yeah. If anything, you could say growth is moderating slightly. So if we're growing cash flow portfolio-wide 9% to 10% a year ago, that may have been 11% or 12%. But it's not negative. So you are slow growth. I mean, where are we? It's still early. And back to the first question from Jonathan, you're seeing margin improvement, productivity gains. Balance sheets are healthy. Companies are delevered. So it feels pretty good. And it's just not in corporate. We see it in the real estate market, too. We're well leased. We're seeing rent increases and strong demand. So everything feels really good. Right now, we're talking about leverage coming out of the system in public markets. There was some concern that maybe leverage was building, or there was some frothy types of behavior in private assets. But I think it's a good question. I think it's a good question. to come from. The CapEx numbers have doubled and the market is, you know, is trying to keep pace, but it's going to be a little bit of a constraint, I think. I thought you were about to ask whether Leopold had given Mike a call. When you talked about a dry powder, I thought maybe. Maybe. I mean, maybe you were the one that was the Grim Reaper colleague. Did you hear some, I love those quotes. Did he give you a call? No. Breaking news. Are there any lessons from that? As you see that story and react to it? No, I don't know. I don't know enough to know. I think if anything, maybe back to your prior question is be diversified, number one, which is, you know, don't be fully exposed to one factor or single correlation. I think that's, you know, that might be the lesson. It might be that experience matters and that, you know, a combination of smarts and experience through cycles is ultimately important. And I think, you know, I think about our own 30-year journey and all the lessons. We've learned navigating cycles and things and you'll learn lessons the hard way. And so that might be the moral of the story too. Mike, appreciate it. It's good to see you. Thank you, buddy. Thanks for being here. Thank you very much. Mike, I had to get you there. The Aries CEO. Quick one before you jump back in. You're listening for ways to help teams move faster, make sharper decisions and turn scattered context into work they can use. ChatGPT for business gives teams a shared workspace with admin controls, permissions and access. To work and codecs and ChatGPT. Before you sign off, you tuned in for ways to help teams move faster, make sharper decisions and turn scattered context into work they can use. You're listening for ways to help. ChatGPT for business gives teams a shared workspace with admin controls, permissions and access to work and codecs and ChatGPT. Download the ChatGPT desktop app or contact sales to learn more.