Ares CEO Arougheti on Earnings, M&A Demand, 401(k) Market

Bloomberg

4 days ago

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00:00I want to start with this idea that you did a really solid performance despite the fact that LBO volumes were materially lower than last year and there was this expectation that deals were going to pick up in the second half because of trade certainty. Well, have we gotten that certainty to really kick start that type of corporate activity? There's a misconception that alternative asset management is just driven solely by M & A and private equity volumes. But when you really zoom out, you say what? What is going on in the private markets? We are active in digital infrastructure, real estate, private credit, asset based finance, and really a broad cross-section of the global economy. So if you look at our quarter, we put $27 billion to work this quarter in a very subdued deal environment. What's happening now in the private markets is there's a huge need for liquidity solutions and refinancing. If you look at private equity is one example. There's about $3 trillion of private equity that's been invested that needs to get returned to invest to investors and about $1,000,000,000,000 of new capital that needs to get put to work. So there's this huge imbalance. And so one of the things that private market providers like us are doing now is really coming in with creativity and innovative solutions to try to buy down that installed base of private equity. So we're not really reliant on deal volume. Obviously, we love it when the markets are ripping, but when they're not, it's it's still pretty good. Does that mean that the lesson you learned from this period of when things are backlogged and again, just given the breadth of the success in your earnings that you need to deemphasize some parts of the business that are more sensitive to M & A, that have more of a cyclical type of attribute to them. I think I don't know if we want to deemphasize. I think part of what we have tried to build is a business that provides solutions through cycles to our investee clients, whether they're private equity sponsors or large corporates and our investor clients. And the only way that we could do that is to diversify the product set geographically, where we invest in the capital structure, what returns, what the structures are. So ideally, what you want to have as a business, which we're demonstrating the can perform regardless of the market environment. Well, part of the diversification was also things are uncertain in the US. Two basis point is that period over is certainty restored? Is it time to hit the go button again on deals? You know, it felt it's always great when I come on the show because you go to bed and you're like, Oh, we're going to have this really nice, calm conversation about how certain things are and how our deal lines are going to pick up. And then we get a new headline. And and as you said, Lisa, I think you have to try to find the signal through the noise. And when we look at our portfolios around the globe, the fundamental performance is still really strong. There's a lot of liquidity in the markets. There is a lot of pent up demand to transact. We saw that in June. I think once we got the tax bill done and we saw some certainty on on tariffs, the market really picked up. So I don't want to say that one headline on one day is going to knock us off course. But yeah, I think there's there's a real pent up demand for M & A. Corporate M & A is picking up, private equity pipelines are picking up. So I'm still optimistic. What does that optimism look like throughout the year? What is your expectation when we get something that does look back to normal, that does see this pipeline that's being built up really be put into force? I think in the on the private market side, you have to appreciate that the structure of the capital actually has a timeline on it. And so one of the things that people need to understand is just the weight of money in the private markets requires transaction activity. And so that $3.2 trillion that I mentioned, you know, half of it is over five years old. And there's a desire to get that money back to investors to get the gears moving again. And so even if you don't have M & A, people are going to be looking for ways in the secondary market, for example, to do transactions. So I think you're going to continue to see, you know, the weight of the money and the time constraint push companies into the market. And I think on the corporate side, you know, there's there's a desire to grow, too. We did see corporate M & A pick up dramatically even in the last week. I'm sure if you talk to the sell side bankers, they'll tell you the level of pipeline and pipeline activity is picking up dramatically. So, you know, I can't quantify what that looks like, but if June was an indicator, you know, and we get some stability here, I think third and fourth quarter could be pretty robust. You mentioned the tax bills behind us, tariff uncertainty, potentially some of it behind us. You see a lot of signal less noise coming from that. And then there's this idea of deregulation is that's what pushing potentially some of this M & A. I think there's absolutely a tone and it's funny you saw pre Liberation Day, January, February, just the exuberance with the new administration, pro-business deregulation and you saw people come off the sidelines dramatically and then we took a pause. Now that we've digested, you're beginning to feel that again. So I don't want to say that the animal spirits have been unleashed, but the confidence that the administration wants to push transaction volume is pro-business and focused on drag, I think is is going to be a catalyst for sure. When you talk, I hear an economy flush with capital. I hear an economy that has plenty of access to financing. I hear that financing is not tight in any capacity. We're talking about tightest spreads in the global credit market, in public markets going back to 2007. Do you think it is appropriate to start talking about more accommodation from the Fed or do you think that that's problematic given what you're actually seeing on the ground with some of the companies that you're investing in? Everything that we're seeing says that the economy is on stable footing. We're seeing continued growth. As an example, we reported earnings in our publicly traded BDC 13% year over year EBIT growth, and those companies, while levered, have actually digested the higher cost of capital pretty well. So to your point, we're living in a higher rate environment. The plumbing is working, nothing's broken. Almost every liquid market is near all time tights. So it doesn't feel necessary to to take a more accommodative stance. I think tariffs will be inflationary. I know that there's an argument that some people put forward that it won't be, but to the extent that they will be and the economy continues to grow, that would argue for rates to stay higher for longer or at least to see a slower trend down. So, Mike, in this quarter you had really robust fundraising coming from a variety of sources, but part of that was wealth, too. We're in this environment right now where there's an expectation that the Trump administration is going to open up for a one KS to some private assets. You've seen some of your peers, KKR, Blackstone, Blue Owl already set up partnerships with one K providers. Is that something you're looking at as well? Yeah, we're we're probably the number two or number three player in the wealth channel right now. We raised about $6.3 billion in wealth product alone this quarter. Close to half of our A um, is in permanent capital vehicles right now. The four and one K conversation is an interesting one. I'm a huge believer in increasing access to alternatives to the individual investor, whether that's directly or in the retirement market. There's no reason that an individual shouldn't have the same access to alternative assets that institutional investors do. The 4a1k question I think is reason for enthusiasm. If you look at the size of that market and the solutions that are already there, that market for forever has really been fi first. And when we talk about fiduciary duty to the retail investor in defined contribution, it's what's the cheapest solution that I can get? And I don't think that that's the way that you want to be. You know, shopping for investment solutions. It is a complicated set of circumstances in the sense that you still have to get through the executive order, which we haven't seen, although we expect to come that we need to see rulemaking. There's going to be a whole flurry of class action lawsuits. I'm sure we're going to have to get plan sponsors comfortable with the idea, and then we're going to have to demonstrate that we can deliver excess return net of new fee agreements to the investor that that get them excited. So we're we're enthusiastic. We have product that's already geared and ready to. Go into that market. We have had significant dialogue with potential partners in that market. So if and when that time comes, I think you'll probably see us, you know, jump in. Just given our leadership position there. But we're being a little bit more tempered in our enthusiasm. It's interesting to hear some of that caution because other people have decided that this is off to the races for getting that involved in the 401k. And part of the criticism that comes up sometimes is you're going to get players that dump their worst assets in there and then that brings within with it more regulation and hurts the industry as a whole. Is that a real concern? I've heard people say that that is not the concern. You know, I think one of the the significant transformations we've seen in wealth from prior versions is you are getting the largest brand name managers around the world that are coming into this market with institutional quality product. We're not going into these markets because we have to. We're going into these markets because we want we want to. And so there's really no motivation or incentive to do that. So I don't really understand that. But one of the things I always try to to say to our people and even to our investors in the research community, when the 41 K market opens, similar to just the wealth market opening, it doesn't have a transformational impact on what we can do as a manager. I'm just now taking assets that otherwise would find their way into an institutional fund and putting them into somebodies for a1k. That's exciting because it now increases accessibility. It opens up new fundraising markets. It diversifies our business, but it doesn't give me a new product to then go into the market and deliver value to my my customer. So we're excited about it. But, you know, until we get to a world where we're feeling like we're constrained in our ability to raise capital and other channels, I just, you know, I again, I have temper, enthusiasm. If you look at our fundraising this quarter, we had our second largest fundraising quarter on record. We raised about $26 billion of of capital this quarter. The fundraising has not been the challenge. I think for most all managers, it's really can I find great quality things to invest in? And so the idea that we're going to continue to bring more capital in, you know, has as much possible risk as it does opportunity. Michael Our Gary Areas Management Chief Executive Officer You've reported earnings. You go on vacation now Monday.