The Fed doesn't have an argument to cut rates this year, says Ares Head of Credit Kipp DeVeer

Is getting used to once again higher for longer rates as Fed chair PAL signals a lack of progress on inflation, at least for now. What does that mean for the credit markets? Our next guest manages nearly $270 billion in private credit. Joining us now and an exclusive interview is Kip Devere, partner at areas Management and the head of areas Credit Group Joining us here on said it’s great to have you. Welcome. Thanks for having me. I guess I should say welcome back. We just lapped a year on the collapse of SVB and all the fallout we saw within the regional bank sector tied to that and and what we saw with with higher rates a year out. I wonder what you’re seeing now when it comes to private credit, especially as we are getting a very busy week full of bank earnings and for better or worse right or wrong there has been this narrative at least publicly that’s been banks versus private non bank lenders like yourself in terms of activity. Sure we don’t quite see it that way. We see the banks as great partners. There was a little bit of a challenging year, you know, for the banks last year, obviously with an inventory of leveraged finance hangover from 22 and then some of the SVB related, you know, blips perhaps last year. But I think the banks are very much back in a risk taking mode. They’re probably reevaluating some of the businesses that they’re in and where they want to focus. But yeah, the narrative of private credit versus banks, we really just don’t subscribe to that. I mean, most of the large banks are significant partners of ours. We have our business. They have our business. They’re complementary. And then, yeah, we sort of dismissed that narrative for the best part. Yeah, you’re partners in a variety of ways. And I wonder how that partnership continues to grow and evolve now. Yeah, I mean, look, we’ve done a couple transactions with banks as they reevaluate their balance sheets. So I think they’re looking at their capital and saying there’s certain things we used to do that perhaps we don’t want to do on a go forward basis. So there’s a reasonably public deal that we did last year with a bank where we bought a portfolio and I think help them from a liquidity perspective. But generally going forward, it’s partnering on new deal flow, thinking about transactions that we can collaborate on. They’re obviously very significant lenders to us when we raise equity for funds. The banks are all our largest lenders. So we’ve got a great partnership with most large money setter banks. I’m particularly curious about real estate, which I know is part of your real assets group. It’s a, it’s a big chunk. And what you expect to happen in office and industrial, I I keep hearing about office conversions, right, because everything that’s not Class A is maybe a little less popular than it was And the idea that a lot of industrial needs to be invested in, in order to get it efficient even for for environmental reasons. What are you seeing? How do you expect that to play out as rates remain high and capital remains at a premium over the next three or five years I think I mean real estate you really I think have to kind of rifle shot instead of shotgun shoot. Commercial office is very different than multifamily then industrial office etcetera. So you know we have a real estate lending business as well as a real estate equity business where we buy properties and we develop. The good news for us is coming into this period where office I think has some secular long term challenges is we’re underexposed both the retail to hospitality and office. It’s less than 10% of the aggregate assets. Our focus has actually been on industrial and multifamily, where we continue to see strength. I think if we had our industrial partners here buying real estate these days, they would tell you it’s a fabulous opportunity for them on the new investment front, as good as they’ve seen in a long period of time, regardless if it requires new investment development, etcetera. I mean, you’ve talked a bit about 3 big secular growth areas, decarbonization, mobilization and digitization. How are you investing for that world where those trends continue? And how does something like the AI revolution play into it? Yeah. I mean, I think our real assets business is increasingly diversifying itself away from just real estate where we’re more focused on infrastructure assets. That obviously includes digital. It plays into your question on technology and AI. So for us, it’s just broadening the fairway in terms of what we’re investing in from where we started. As we talk about this idea of hire for longer, we’ve seen a more hawkish tilt, if you will, by Fed chair Powell and and others at the Fed as we’ve seen inflation data stickier. Your outlook for rates and whether we get cuts. Yeah, I mean, not being an economist, I’m actually in the the Fed probably doesn’t have any real argument to cut rates at all this year is where I live individually. I think people at the firm might view it a little bit differently. I guess the consensus is 3 rate cuts before a year end. I think you see pretty good economic growth. You see companies and consumers adapting to higher rates and an expectation that they’ll stay higher for longer and it doesn’t seem to be disrupting that much. I think the consumer is still spending. I wish corporate deal activity would pick up a little bit. So I think the higher for longer moment is perhaps continuing to put a pause on M&A and transaction activity which we hope will break at some point. But our forecast if we had to go over or under the three hikes I think would be an under.