Ares Management CEO: The private equity industry is currently experiencing some difficulties

Current debate just in the macro land is how, how much progress we’ve made and is it enough for the Federal Reserve to start cutting rates and what that might mean for the market. What what’s your view on this? The good news about the business we have is we have investments in thousands of middle market companies and real estate assets and infrastructure assets here in the US and around the globe. I guess the good news, bad news is everything we’re seeing in our portfolios would tell you that the economy is still on really solid footing. To put that in perspective, in our middle mark market corporate lending books, we’re seeing 10% plus cash flow growth in our private equity portfolios. We’re seeing 13 to 15% cash flow growth in our real estate industrial portfolios, you know 40% year on year lease growth. So there’s a lot of fundamental strength in the how much of A downturn despite the GDP print last quarter, we’re not, we’re not seeing it. So that would tell you higher for longer and that’s been our base case now for quite some time and I think the market is beginning to digest that reality to labor force participate participation still very high labor market, tight unemployment in a good place. So you know, that’s going to keep some pressure on rates. There is a political overlay. I think it’s hard to act aggressively in an election year. So I think there’s going to be, you know, a bias to not acting. And then lastly, a big conversation happening here which I think is important is just structurally when you look at the treasury market, are we in a place where the long end of the curve is just naturally going to stay higher for for longer as well. So and is that your base case? It is, Yeah. It is higher for longer because the economy is in good shape or because fiscal. It’s it’s both. I think they’re two, you know, currents that are amplifying each other. I think it’s also important when you think about rates, whether it’s down 25 or down 50, you have to underwrite I think a higher neutral rate and we need to adjust to an interest rate environment that’s not zero. And so whether we landed Fed funds three, 3, 1/2 or 4, we’re still going to have a lot of transitioning to do in the economy and in some of the asset markets that we play in. Well, let’s talk about where you play in private credit and the explosion that we’ve seen. Does this backdrop mean that it will keep growing or is it, is it getting a little crowded? Well, again, there’s structural and there’s cyclical things at play here. So structurally, the private credit markets, in my opinion, will continue to grow quite naturally, both in corporate and real assets. That’s a function of just the growth and maturation of private equity. It speaks to some structural changes that we’re seeing in the banking market with assets leaving the banking markets. It speaks a little bit to long term trends in public versus private. So you have real structural, you know secular tailwinds and then cyclically right now private credit is offering very attractive risk adjusted returns. It’s floating rate. It benefits from higher rates. So you’re seeing big capital allocations that are coming out of traditional fixed income portfolios and in some cases private equity and moving into private credit. But with everybody getting into private credit, isn’t it becoming more competitive for the good deals? I think that’s a little overblown. If you look at the size of the addressable market, it’s still quite small relative to the amount of capital that’s been raised. And you can look at that either in terms of private credit relative to the liquid fixed income market or the amount of dry powder in the private credit market relative to the private equity market. And any way you look at it, despite the growth that we’ve seen, there’s actually still a lot of room to grow. What about within private equity right now? How big of a growth business is that for you given the hire for longer outlook? All of my private equity colleagues always, you know, get mad at me when I say to you that private equity isn’t a growth business. That doesn’t mean it’s not a great business for us and that it’s not growing. But you run a private equity business differently than you run a credit or a real estate business, much more episodic, you know, intense active management. So it’s a big business where it’s about $30 billion business and growing private equity as an industry is having a little bit of a difficult time right now. Obviously there was a significant amount of private equity that was raised and deployed going into the rate hiking cycle. And now given where valuations are in this rate environment, that market is still a little frozen. We are beginning to see it unfreeze now that rates have stabilized. Obviously if they start to drift down, that’ll accelerate transaction lines. Speaking of rate stabilizing, Bruce Flatt was here of Brookfield Asset Management said the commercial real estate stress story was last year’s story. He says it’s bottomed and activity is peak picking up. You play here too, what do you, what do I, I, I would, I would generally agree. Again, real estate is a huge global addressable market. It matters what geography and what asset type you’re talking about, right. So there are still going to be pockets of stress given the amount of leverage in that system given who holds some of those loans whether in CBS or on bank balance sheets. But I would agree with rate stability and with economic strength, we are beginning to see transaction volumes pick up on the real estate side for sure. On the on the private credit, one question about market share versus the banks and and what’s happening there, how much you’re taking and whether you think that’s going to attract some regulatory attention. You know, I don’t, again, I think it’s a really good story and a good headline, but the the market that we’re competing with the banks is such a small sliver of what we consider to be the private credit market. And really what’s happening there is just a shift of share from the leveraged loan and high yield market to the upper end of the private credit market. That’s a very tiny percentage of what we would perceive to be the opportunity in private credit. And for the last 20 years when the banks de risk either because of rates or credit losses or unsold inventory, the private credit markets have consistently come in to support those markets. I think that’s good, right. It’s a stabilizing factor with private markets coming in to you know infuse capital into those markets. So I don’t.