Private Credit Keynote with Ares Management
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Private Credit Keynote with Ares Management
June 6, 2024 | 10:15-11:00 AM
SPEAKERS
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Tom Lemmon
Hello again. Thank you for joining us, Joel. We actually did the same chat. Well, I guess it was the first Aries Invisso, private credit summit in Miami in October. The same thing. So obviously, Miami's very nice. How's Barcelona been?
Joel Holsinger
Barcelona is a better city. I'll say that Barcelona has always been one of my favorite cities in Europe, because it's basically the to make a US comparison at San Diego, everybody's laid back, everybody's relaxed. You know, it's a very walkable and very likable city. So I'm always happy when I'm in Barcelona.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
2024 feels like it's been a lot more positive as a year in credit on the whole I guess, what sort of surprised you the most?
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
I was surprised. My first question wasn't on Irish tax law. What surprised me the most? I think we expected, you know, in November and December, as we started to see the dreams of rate cuts becoming alive, we expected to see a ripping ABS market. In fact, we were talking internally with the team, and we said, look, we were really, really busy post the bank crisis. At the end of the second quarter, with the PAC West portfolio, we bought for three and a half billion. We were really busy on significant risk transfers and capital relief trades. In the third and the fourth quarter, we had the busiest fourth quarter we've ever had across the illiquid side of our markets. What surprised me was I fully expected us to be slow in the first quarter on the illiquid side. So if you think of and I think it's probably a good distinction to make. There's been the conversations. Everything we do is asset based. Everything we do our portfolios, it's basically the illiquid and the liquid side of the ABS market. We really have three pools of capital. We have our insurance solutions. Pool of capital. We have our kind of core portion of our capital, which effectively call it is 450, spreads to 650, spreads. And then we have our opportunistic pool of capital, which is kind of looking for 11 to 15% plus. But I think that the market, you know, if you were really to define the market and where it's going, and I think it's really relevant to the ABS market broadly, is you should really divide the world, not in that way. You should really divide the world into public rated, private rated and non rated. Because if you think of the world that way, the basically, most of the traditional ABS market has been public rated. The transition we're seeing, as we'll talk about, I'm sure, later, in others, with insurance and others, is a lot of capital is going from what used to be a publicly rated deal into a private rated deal, into insurers directly in others, which is included in our insurance solutions and our captive in espita, but also is included with regards to our third party insurance companies, where we're the leader. We believe we have the largest pool of capital by a lot over over anyone is on the unrated side of capital. So when I say that, I expected to be slow, I expected to be busy on the public and private rated, I expected to be slow on the non rated, and that non rated piece of the market, we've continued to be very busy. But I look at it as you know, as much as the ABS markets are back and humming and very bullish right now, there's been two years of, you know, fits and starts and stops and back and forth, and so the machine really didn't work for two years. And what's happened now is the machine is restarting. And if that machine is restarting, it really creates a huge demand for unrated capital, because you need the equity, you need the debt, you need the warehouses, you need to originate it. Because, if you really take away everything but the CLO market, the CLO market, you ramp to the secondary market. You know, you ramp the assets, the assets are there. You can ramp a new clo if you talk about resi, if you talk about consumer, if you talk about autos, you talk about, you know, even nav lending or other things we do. All of those assets have to be created. You know, those assets have to be originated. They have to be warehoused. And so when you look at the market today and you say, wow, we've had these huge movements and spreads on the public rated side, well, of course we have, there's no supply. There's massive demand, and there's no supply that's out there. So that's what's really surprised me in 2024 is I expected it on the rated side. I've been surprised by how much capital dearth there's been on the unrated side, and so the illiquids continue to be busy. Whereas if you go back a year ago, at the end of 2023 we had the same phenomenon, right? It was the end of inflation. We thought, hey, we peaked, and the markets kind of ripped in the first quarter before the banking crisis, we were quiet as anything on the unrated side. But this has really changed even before M and A, even before other markets. It's been really busy on both parts of what we
Tom Lemmon, Global Securitisation Editor, GlobalCapital
do, I guess. How long is that going to continue?
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
Well, so part of its advance rate, you know, part of. It is rates, which is the earlier panel said they everybody believes in higher for longer. I don't, I don't. I don't see it. I look at the market and I say, Okay, so the only thing in the US that's holding up inflation has been shelter. It's been housing costs. I think we can all agree in Europe, rate cuts are coming, and they're, you know, we're effectively near recession or in recessions in certain parts of the EU. And so when you look at the EU us, the only part that's there, it's lagging. If you go back a year and a half ago, the Fed was telling us, and PCE was telling us that housing was basically barely inflationary. And we're looking at our portfolio and saying, then, why are we getting nine and 12% rent increases. You know, it's very lagged. And now you look at it and they say, Oh, they're starting to see it coming down. It started coming down nine months ago. You know, you started to see the rent come down across single family rental and multifamily in those other areas. So there's a shot that parts of housing become deflationary in the near future, and people forget when they really look at inflation numbers, services, was always 3% so everything else, the goods and others, were basically deflationary. So if we're in a market where we're returning to that kind of an inflation market, and it's just lagged on the data, of course rates are coming down. The question will be, does the Fed screw it up on the way out as they screwed it up on the way in? Do they wait too long, and do they end up causing a recession because they wait so long, because right now the pounding on the door that you hear is the banks pounding on the door for the Fed saying, Holy Frick, just cut rates because you're killing us. Because this inverted curve and the increase in the liabilities the banks are paying right now is destroying banks in the US, as well as in Europe, and that Nim is continuing to get shrunk time over time, so you're creating your problems up tomorrow, and that's before you talk baseline game, before you talk commercial real estate, yeah,
Tom Lemmon, Global Securitisation Editor, GlobalCapital
okay, on private credit, feels like there's been a I felt like there's been a bit of a concerted effort to really talk about the asset back side. I know you say all you do is asset back, but I certainly feel maybe two years ago, it was like, this is private credit. Is new, this word, and then the last year, let's say, has been how it's going to get into things like securitization. I guess what? That's going to be ongoing. There's probably a lot more work still to do there. But what's next? Maybe as well as question, I
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
think there's a fallacy. And the same fallacy happened in direct lending pros, GFC. And the fallacy is, is this is new? Yeah, the fallacy is, I've been doing this for 27 years. I got my start with Citigroup 27 years ago, and I was doing assets and lending origination and putting them on bank's balance sheets. The fallacy is, in direct lending, that exact thing, same thing was happening in GFC, so that the assets that are getting originated, the deals that are getting done, even public versus private rating, they're the exact same deal. It's just a public rating versus private rating, the illiquid stuff just used to be on banks. Balance Sheets used to be in other areas. But if you go broader, and if you go back to, you know, I'm a history geek, if you go back to 10,000 years of written history, all the way till 1970 you had one pillar, you had one money multiplier. If you're a sovereign, you had one pillar and one money multiplier. It was banks, whether you're Medici or other times, whatever you're talking about, if you're really going to look at it. Now 1970 something changed, which is securitization market opened up. The beginnings of the securitization market. It started in 1970 didn't really start till 1980 now, if you look at it, you don't have a pillar, you have five you've got banks, you've got insurance, which are dramatically larger than they were before. With the capital they have, you've got securitization market, you've got, I would say, sovereign wealth and pensions, because they kind of act in their own pillar in many ways, and you got private credit. The thing is, all of those work together and compete at the same time. There's a partnership and a competition that's occurring across all of those there's a synergy that's occurring across those markets. So the assets in the areas are not new, if you look at it, I got a question. I got a question at a panel like three, four months ago, they said, well, asset based credit, this is really interesting. We get it, but how do we evaluate these managers? You know, with regards to not having track records since this is also new. And I was like, Well, I've been doing it for 27 years. Aries has been doing this since 2011 we have a 13 year track record. If somebody doesn't have a track record, it's really easy, walk away. There's nothing to do like you should have a track record in this space. It's amazing that effectively a $40 trillion total addressable market. There's groups out there, and some of them very large, and some of our largest peers that have suddenly discovered that there's a $40 trillion market that exists out there. So the market's large. The transition is the same transition that happened in direct lending. If you go back to post GFC, you're having this transition where banks want to go more boring, the regulators want them to go more boring, because of all of those four. Pillars I mentioned, every one of them has matched funding. Beyond banks, they're 10 to one levered. Private credit is not levered or is one to one. Insurance is levered, but it's matched. It's 10 to one levered, but they're matched funding across that the only one that borrows short and lends long are banks, and the only one that has federal guarantees in a large way, are banks. So of course, banks should be boring. That is where your systematic risk is. If you look through history, in the in the 27 years I've been doing this, if you look at it from the standpoint of LTCM, if you look at it with regards to covid, if you look at the GFC, you look at, if you look at LD eyes, there's a there's a very simple access axis of where, basically your systematic risk is banks and the most liquid of assets, because it's banks over lending to the most liquid of assets. LTCM was not a bailout of a hedge fund. The hedge fund was a zero LTCM was a bailout of the banks. If you look at LDI, you look at the covid on the agency mortgages, it's that access that's there. So all that's occurring is you're taking assets from here and putting them to here. And the thing is, in the US alone, it's $23 trillion of us, balance sheet of banks. Half of that is what we do. So if 1 trillion of that goes to the private credit market. You're already as large as the direct lending market. So that's where you have this tailwind that's turning into this jet stream. That's where this conference, if you fast forward five or six years from now, will be half private credit and half, frankly, public rated and private rated.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
And how are the banks working with you? Now, you said you touched on it a bit, but they seem to be sometimes collaborating. Are they sort of, you all sort of do both at the same time?
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
Look, there's there's been some of my peers who have said, we're here to compete with banks. We're here to partner with banks. We're not here to compete with banks. If you look at it, anything we're doing, are things the banks aren't doing if you think of nav lending and what we're doing, we're doing it at either on the rated private rated basis, that would be just outside of bank spreads on a rated basis, and that's going to be stuff that's going to be at 300 or more. If you look at it on an unrated basis, we start at 450, 500 banks aren't doing that. If it fits in the bank box, they're still doing it at 250, to 300 they're doing it inside of what we're doing. We're not competing with them. Where banks are partnering is, they are providing financing across different pools of assets. Where banks are partnering is we bought portfolios like PacWest the three and a half billion. We've done capital relief trades, and we'll continue to be active in that market, although, frankly, that market's not as interesting as it was a year ago. You've already seen that market. I think it will change near year end, but you've seen that market with a whole bunch of metoos people wanting to come in to raise a fund with not a lot of supply. And so I think that that dynamic could change. And we've also partnered with banks with regards to, you know, that transition of those assets that are coming to the other side. So whether it's financing, whether it's capital relief, whether it's buying portfolios, if you look at the Ansley Park deal we did on the equipment leasing, which will be securitizing to all of you over the over the next few years, if you look at Ansley Park, Ansley Park was a non core for banks, because if you're a bank, you have 20 businesses you're in now with baseline game, plus your commercial real estate losses coming, you're going to get it down to the five or 10 things you're really good at, because baseline game kind of levels the playing field. Nobody has their own special model. Everybody has the same model. So you better be really good at adding value in that asset class. So those other 15 to 10 things that you do are a lot of those are going to come on core, and it's a different answer for every bank. Like, if you look at some it's, it's not tied to deposits. If you look at others, it's, we kind of suck at it, you know, we have bad loss histories. Or others, you look at others, it's, Hey, this is really unkind with Cecil and other type regulatory things. So as those non core businesses come out, you're, we're going to be acquiring them as as assets or as platforms. We'll be doing the capital relief, we'll be doing the portfolios. But there's this all in a partnership with trying to help with the banks. But also they'll be financing us. They'll be sourcing, they'll be selling bonds. There's there's a very sim, there's a very good relationship that goes between us and the banks.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
We talk about your the private credit firms versus bank relationship. What about these sort of smaller private credit firms and the bigger private credit firms? You know, I think it's often been said that the likes of Aries, yeah, they're fine, no problem for them doing all of this stuff. But the smaller guys have found it a bit naturally more difficult. Do you see a lot of consolidation just becoming inevitable?
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
Yeah. I mean, if you look at it, we have 400 and just under 430 billion across areas, and over 300 billion of that is credit, and almost all of that is private credit. And you know, we are known for private credit. I think every one of the large firms is known for one or two things, and there's no doubt that that's the area that we consider ourselves, the leader and so but I would say broadly, it's not like there's going to be one winner, there's going to be four or five winners. There's going to be some large players that play across that will come at it with different approaches and come at it with different capital the key is matching up the opportunity set with the capital base, making sure that you have the right type of capital to chase that. We've had some peers who have put all of their weight on one side, which is the insurance or the private rated side, and the failure there is, you're ignoring a massive market on the private side. You have some that are very large players that are raising their first fund ever in that space. And so what we've done is we have balance across all three pools of capital. If we have great risk, we have a home for it, whether it's insurance, whether it's right down the middle, and kind of core type strategies, whether it's something that's more opportunistic. If you go to the smaller players, there will be four or five winners. And not to offend anyone in the room, but I don't think small players have a reason to exist. I look at it as it's just, it's just the natural evolution of private credit. If you look at, you know the one thing, there's a great book by Will Durant called lessons from history, and it kind of goes through the guy who wrote 10,000 pages on history, history over his life, and he did the greatest thing ever. He wrote a cliff note. Version of it. For us, it's like 150 pages, so it's digestible, and it's, it goes through basically all of these patterns over history and talks about it, and some simple things of, you know, you know, history follows water. You know, if you think of the rivers and the oceans and others, but a lot, a lot of it is mankind moves. Man advances. Mankind advances. Mankind moves forward. And if you look at history of finance, it's the same thing, you know, Goldman. If you read the partnership, the book that goes through the history of Goldman from the beginning to end, they were making a whole bunch of money in the 1970s on block trades, something you can do on Charles Schwab today, for $8 you know, like, like, you know, like that, that those things don't go backwards. If you look at Vanguard of Blackrock and the consolidation that's heard across index and EFTS, those things don't go backwards because the regular ironically, every time regulation is added, another small private credit group dies because you can't exist from the cost structure that's needed and raise capital, and your large investors want to write large checks. So when you look at sub 10 billion, especially, there's this race to attach yourself to a larger pool of capital, because there is this consolidation that's kind of occurring. And so there will be a few but over time, that advantage you have, if you want to say, what's one pattern we have across all of our pipeline today, and why we're busy at scale? If you actually look at the you know, we do deals down to $50 million in size, people like to say we don't. We do them all the time. But if you look at it, the part where the best risk is and the best returns are are deals that are 200 500 a billion, where we have the ability to write scale, nobody else can do that, and that's a huge advantage. And you don't just write scale, you get better risk. And so that's where it kind of begins and ends.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Do they not keep you honest in other areas? Well, so
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
like, I think the fallacy of why people think that there could be all of these small players is private equity. Because private equity you can, you can have a small team buying companies. You only have certain number of underlying companies. Even in venture, you kind of can, because there's no massive scale advantage there. There is on fundraising, but there isn't on execution. If you're good fundamental investor, that's there. The thing in credit is you're not doing three deals a year or one deal a year. You're doing a number of deals a year. You're building up large portfolio. You have to have systems, you have to have asset management. You have to have those analytics. All of that goes in there, like operations and infrastructure and, you know, at areas alone 13 years, but broader from our careers, infrastructure is built by putting fingers and dikes. When you have a leak, you fix it, and then you patch it, and then you find another leak and you fix it. You can't create infrastructure out of out of the air. And so what happens is that you look at it and you look at the thing we're most proud of is our loss history since 2011 and keeping that relatively low, you can't recreate that overnight. And so the advantage you have with scale, with that infrastructure, the advantage you have with long track records, it can't be underestimated. And that scale, it's the same reason you're basically making the analogy of like, Should small banks exist? Hell no, they shouldn't exist. They have no reason to exist. And so if you looked at the really small banks, they are totally out competed by your large G sibs of the world and others, and your large multinationals. And that's only going to happen. We had 12,000 banks in the US. If you go back to the beginning of 2000 and you look at it today, and we have 4500 and that number is not going. It's going down. Yeah, that consolidation will only continue to occur.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Changing tax slightly. Regulations in Europe are obviously a big topic for everyone in securitization over the last what, 20 years? How is it affecting your plans in Europe and in Europe and in private credit, the sort of changes that we see coming through.
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
Yeah. I mean, look, in the States, a big one with the SEC, the appellate courts struck down the private funds rule, so that will have a big ripple, which I think would generally be positive, because there was a lot of regulations for regulations were built into that. I think when you think of regulations from bank standpoint, regulations create opportunities like we call our newsletter in the gaps. We like to think of it as it's written, in a way that is kind of Howard Marks like. But we actually try to say something. We actually put our opinions in there. And we've been pretty bold on we talked about, you know, we talked about the bank crisis before the bank crisis. We talked about the fallacy of of the music royalties and the prices that were getting done three years ago. We talked about the weakening of the consumer two years ago. So feel free to sign up. We're very proud of it. We put a lot of work, and they are in the gaps. But if you look at it in the gaps, there's a reason. It's called in the gaps. Yeah, the gaps are created by regulations. The gaps are created by accounting. The gaps are created by when the markets are open or when the markets are closed, liquid and other markets. The gaps are created by, does it fit into the bank box? Does it fit in the securitization box? If it doesn't, everything that's done in the ABS market, everything that's done in financial services, we do on the illiquid, on the direct side, if it's in the box, we do it on the insurance solutions, whether it's public rated or private rated for our insurance
Tom Lemmon, Global Securitisation Editor, GlobalCapital
clients. And I know there's some sort of proposed changes to solvency too for insurers. Do you think that's going to have a big impact? I
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
think Europe has to change solvency too, because what it's done is the joke of, you know, we went to the gaps, let's go to the box. The joke of the boxes is you end up forcing everybody into the exact same asset class. And I would argue, right now, insurance is very heavy on corporates, just because anything with an SBE is a bad, you know, with regards to the treatments. And if you look at the balance sheet of insurance of US and Europe, nothing could be more different. You know, in the US in Europe, you got a whole bunch of gums and others that are sitting there. You got a lot of corporate exposure. You really have barely anything on the ABS side. And that's Look, people say the ABS market in Europe, it's so small. Well, that's why it's small, because the ABS market in the US was created for insurance companies. If you look at, if you look at that, though, it's pushing them all into a bad part of risk. And so in insurance in Europe, generally, you end up doing more of your risk on the liability side. In the US, you actually stay boring on a lot of what you do. The annuity market's boring on the liability. You make your money on the asset side because he can't, you know, because if you're forced to, I can't make money on the asset side because I'm so restricted over here. I gotta go do some I gotta go. I gotta go to the Lloyd's. I gotta go do some stuff that's got a little more air on it. I gotta go make my money on the loyalty side or on the on the liability side. So I do think that those things will change, because, you know, one of the things from Will Durant, the pendulum swings. You know, the pendulum swings. It always swings back. And I think that a lot of solvency, too is an overreaction to the GFC. And I think that you'll see probably an overreaction the other way. I think it's the same thing the 6040 model. The overreaction is the 6040 model is dead. I would say the 6040 model is just in a different form. It's not fixed income in public equities. The flaw of 6040 was fixed income. It should be floating. It should be credit. You should have a huge part of your exposure. That's credit. It's the downside protection. You should just do it in floating rate exposure, which means I do direct lending, I do flow, I do Clos, I participate across, you know, asset based credit and what we do, and we're lending across that, and the public equity should be more private, whether it's real estate equity, and for equity or private equity, it's more of the changing of the of what goes into those buckets that changes, but it's not necessarily the credit versus equity component of it.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
So, What? What? What are the sort of the best relative value. That's the classes you're seeing. So
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
I'll speak just to our world. You know, look, we hope that the supply demand at the end of the year swings back. The pendulum swings back, with regards to SRTs, and that becomes more interesting again, right now. It's not as interesting as we like it to be. We continue to be very busy in nav and fund finance. And fund finance, you really got to divide into two categories, the nav lending. And it's worth saying across fund finance, you'll people talk about it. They really only talked about private equity. We do all four flavors. We do private equity, we do real estate, we do infra, we do secondaries. And that's kind of. Neapolitan of the three, because it mixes them in. And if you think of that, nav lending, we've continued to be busy, especially the last four or five years. On the private equity side, we're seeing a pickup, a little bit of infra, a big pickup, for all the reasons you can expect in real estate fund finance, and that's an area that we think will continue to grow. And secondary is because there's been more acceptability of rated, private rated or public rated, there's been a pickup on the secondary side of nav lending. The other part of fund finance, though, is GP structure. The other part is, you know, why is nav lending became, become a bigger thing? Part of it's just the natural evolution. It's like sublines. If you go back to early 2000s they barely existed. Now everybody has one. I do think nav will only continue to expand. That evolution is there. But the broader piece is there's no dpi. There's no money coming back to investors. And if you want to raise a fund, I need to return capital. Well, also if I want to raise fund, I need to put a lot of skin in the game. So GP structured deals where they want to put $400 million in, they'll put 100 million. When we'll put in 300 million, they pledge some management fees or other portions. That area is also continuing to grow, because behind the scenes that allows them to show that that ability to put money into the funds and that they believe in what they're doing and help them with the fundraising piece. So I think that those two areas will continue to grow net lease, I think could get interesting again if we start to see the rate decreases. Right now, it's kind of right at that pause period. I think that we'll continue to see non core come out of banks. We'll continue to see that bank theme play out. We won't see the portfolios because the SRTs open up the valve. So you don't have to sell the portfolios. You don't have to sell your best assets that are floating rate. You can just do something on the capital relief side. Why
Tom Lemmon, Global Securitisation Editor, GlobalCapital
is it less interesting to you?
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
It's less interesting because the same deals we were doing, you know, a year ago, are getting done way inside and with higher risk. So what we don't do is black box. I look at it as if I don't know the portfolio. How can I integrate the risk? And so some, especially in Europe and some of the corporate IG deals, they'll do it on a black box basis. I look, I don't know how you get comfortable, or you stand in front of your LPS when your black box backfires on you. Yeah. So we only do them if we can underwrite the portfolio. We've done them against autos. We've done we've looked at them across, you know, student loan portfolios. We looked across fund finance assets. We've looked across, obviously, the corporates. I think that will pick up, because banks don't really do SRT. They want to do them at year end, because they want to keep their Nim and their pre tax income all year and then deal with the regulatory so ask me in the fourth quarter, you'll start to see a rumbling in the third quarter. Good in there, but right now, the supply, demand, I mean, it's the one I always like to give economists the hard time, because they're always wrong is with economists. The one rule of economics that's always right is supply, demand. Supply, demand affects all of our markets. Why do we invest on a relative value basis and rotate across everything we do, whether it's rated or unrated, is because it never stays interesting for three to five years. There's always these periods where they're just too much demand flows into a small market and makes it wholly uninteresting. You know, there's areas like aircraft that are interesting, like once a decade, you know, otherwise, there's not much to do in that area. SRTs are the same. You know, there's if too much money flows in, then people are going to be taking more risks than they should for less pricing, and that becomes very uninteresting very quickly. So right now, we're watching to see where that market goes and see if it's interesting. And if we can, if we can underwrite a diverse portfolio. Our advantage is scale. Our advantages is the asset classes that aren't corporate, in many ways, because that's where we bring the most expertise to the table. And
Tom Lemmon, Global Securitisation Editor, GlobalCapital
is there on the flip side of all this, is there anything you think that's really overpriced?
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
A lot's overpriced. I mean, look, I think that this market right now, on the on the public ABS side, you know, spreads have come in in a bigger way, because of the same supply, demand. There's, there's not enough supply because the engine hasn't got going. Their machine hasn't got going. So if you look at corporate OAS as an indicator, you know, we're at, we're at three standard deviations right now. And if you look out on duration, and you say, Okay, 10 year assets, it's going to get worse before it gets better, because nobody's issuing new 10 year assets and 15 year assets on because who wants to rate, who wants to write a liability into this asset class? But there's a huge demand for it from insurance and others, and so you're only going to see this pressing down that has nothing to do with fundamental credit. The reason that everybody at this conference is so bullish but not very happy is two simple things. We're going to do huge volumes, but everybody's buying what they have to because they're forced to, because of the supply demand imbalance with regards to the markets and others. And if you're at a bank, you're going to do some of your best volumes ever. And. Your bank still struggling, that doesn't create a great bonus environment, you know? So, so I think that you're those the markets that are repriced are definitely more on the liquid side right now. I think on the illiquid side. There's still a lot of opportunity to rotate across the relative value and asset classes, but we've seen certain of those niche areas become holy and interesting very quickly. Yeah,
Tom Lemmon, Global Securitisation Editor, GlobalCapital
we, at the start of this, we sort of talked a little bit about where we see the world going, I guess. What are more clearly, your expectations for the rest of the year and into 2025 you spoke about rates a bit, but so anything else?
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
Yeah, I look, I do expect rates to come down. I think the ECB will lead us off, and then I think the Fed will not be that far behind. I think the test of this market is not the rate cut. The test of this market is is what happens when they do one or two and stop, because everybody is waiting for the rate cut, and everybody's going to celebrate when they get the first rate cut. But what if we only get two? What? What if? What if that what? You know, the thing that nobody's been able to determine is, what's the new normal with regards to rates? We know it's not zero, and so somewhere between zero and four, there's a number, and if that number is three and a half, this market's going to go, Oh, crap, that's not where anywhere near, and you're going to have to deal with the reality of all of those assets at other rates. So I don't think it's three and a half, but I do think that you're not going to get as many cuts as quickly as you want after the initial cuts are made. So I think that that leads to a market you know that, plus public equities, you know, not a mark we play in. But there was a great analysis I saw about three weeks ago that basically showed through, you know, host depression, the history of the the equity markets and the correlations with regards to PE and earnings and where we are. And the answer is, we should expect for the next five years, 6% now. 6% for the next five years does not mean 6% 6% means this, right? It means volatility. And I think when you have this kind of public equity expectations, where the entire market's trading off, Nvidia, I think that the thing that if we actually have some period of dislocation of volatility, actually might normally it starts in credit and goes to the equity markets. It actually might start in the equity markets, because that's price to perfection, more than anything right now. And
Tom Lemmon, Global Securitisation Editor, GlobalCapital
just lastly, because I do want to give some time to the questions, so feel free to do it on the on slido, but, but you do a lot of work around investing with purpose, and I know that's something that's sort of, you know, very, very important to you. So do you want to expand on what, what you guys do at Aries in that? Yeah,
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
what we've done, and we were the first to do it in this scale, and we're very proud of it, but, but to be clear, we want everybody to copy it. Is our flagship funds on the alternative credit side, which, if you go back to a press release on our Pathfinder two closing, is about $17 billion of capital today. That's the number I can quote. So it's about $17 billion of capital at the time of that press release. All have a charitable tie in. It was my big ask when I joined Ares. Is about six years ago, I went to Mike araghetti, our CEO, and I I said, I'm yours if I want to, you know I want to invest how I always have invested across assets and TAC ops type investing, but I want to have a charity tie into what I do next, and it was inspired by a trip to India about seven years ago. I've supported, personally, global health for 1314, years. I'm a poor preacher's kid that came from nothing. I am. I am the exception of exceptions here. I guarantee I have the worst education of anyone in this room with regards to college and others. You know, I went to a state school because that's what I could afford and others. And so I wanted to come up with a way to give back the trip to India kind of inspired me to, Okay, it's time to do something that has that. And so what we came up with is at least 10% of the Promote of our main flagship fund, and 5% of our other goes to of our promote goes to global health and global education. So it comes out of our pocket, not about our investors. It's totally bipartisan. You ask the ESG question, we're not we're investing the same way we've always invested. We're doing what we know how to do. I even considered going and running an Impact Fund, and then I realized I don't know anything about investing in impact. And honestly, I'm not sure a lot of people know that much about investing in impact. So I know how to do what I know how to do, and I love investing. And so how could you tie that with the other passion, which is the charity side. So we've already accrued over $23 million in four years that that will go to global health and global education. If you run the math forward on there, effectively every billion dollars we have has the potential to to generate another 10 to $20 million that will go to global health and global education. It started and inspired the broader foundation at Aries that's. In Ukraine. But if you actually were to say the actual, the the the personal side, has been absolutely tragic, the markets has been a relative, none of it. So I think generally in investing, you're supposed to move forward and ignore kind of the the reason I never read books that are current affairs. I only read history when it's 10 years or more, because the current affairs are always wrong. It's always the headlines. They go up and down. Well, the current affair stuff you have to ignore, and you have to look further on the horizon, and you have to make your investments, because if you're making your investment based on what's going to happen on a presidential election, you're already screwed. I mean, you got no shot.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
Yeah, I spoke to a lot of people in us, Clos about it. They were like, look, the market's busy. It's never they're never going to shut down. Obviously, if some think it will
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
have ripples, there will be a very big positive and a very big negative if either one is elected. Yeah, there's a there's a balancing and a thing that will occur. There'll be less regulations and a whole bunch of chaos. If Trump is elected, and there'll be more regulations, and, you know, and we'll see where the the economy goes if Biden stays in place. Well, the
Tom Lemmon, Global Securitisation Editor, GlobalCapital
other interesting one is Biden wins, and then it goes really nuts that that could be the slightly, I
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
don't see that. I think, I think that's more of the same. If he wins,
Tom Lemmon, Global Securitisation Editor, GlobalCapital
generative AI driving private credit growth. I don't think
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
it drives private credit growth. I think it AI has been way overstated in many ways. It's a lot of what people are mentioning is AI. 90% of what's being mentioned is AI is a learning algorithm, and a learning algorithm has been in existence for 10 plus years, so it is clearly getting to levels, and it has more to do with computing power, and more to do whether we can to where you can really drive your analytics and your correlations and others. And I do think that we're only starting to really tap into that, but I don't think it drives the credit growth as much as it just continues to make you a better investor. I am still a very big believer that the most powerful thing in the world is not AI. The most powerful thing in the world is human plus AI, you know, there was, you know that the ability there's, there's still the ability to drive, you know, it's another tool, and the ability to combine those two things, and those lessons learned, and those things that you can never teach a computer and never go through, those are the parts that you power that with AI, and that's where it becomes really powerful. So I don't think it changes the world. With regards to the other piece, I think it will have more of an impact on the most liquid of markets, because your information is better, because the main problem you have. I did an interview at our AGM with Mike Milken, who's been a friend and a mentor, and we've done a lot with him over the years. And I told him I did research on pre interview. I was in your seat, and it was AI, and it talked about the fast food restaurant he started in 16 and I Googled it, and I couldn't find it, and it was a total hallucination. So it's still human plus AI, you still have to be careful. There's it's still garbage in, garbage out. It still goes back to my Commodore 64 days of how that works. You still have to be careful, but it's still the most powerful with being used as a tool in combination with
Tom Lemmon, Global Securitisation Editor, GlobalCapital
human that second question about us, commercial real estate? Yeah, I think that's really interesting about what opportunities you see?
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
Well, the one before the EU I just want to say we have a big team in Europe. We're already here. We've been very active. There's a couple articles in the press that I you know, that were have come out in the last couple days. One of them I'd mentioned on a deal we closed in the fund finance side in partnership with harbor fest, where we were backing a billion two facility there and participating in that. We continue to be very active in Europe. We also have a team in Australia and New Zealand. We continue to be active in those markets. I think that, you know, the banks have always been the biggest player. I think that's backing off, obviously, because there's the commercial real estate. They were huge players, and they have to deal the commercial real estate problem in Europe is nowhere near the commercial real estate problem with the offices in the US, but it's still creating these opportunities. So we continue to be busy on the private ABS side. We continue to be busy with regards to NAV lending and fund finance. We continue to be busy in partnership with real estate on kind of real estate fund finance, as well as our bridge preps and other transactions that are out there. We're using our scale, we're using our capital to drive that. So sorry I skipped.
Tom Lemmon, Global Securitisation Editor, GlobalCapital
No, no, that's fine, but I think we're getting our red flashing light, so I think we're out of time. No
Joel Holsinger, Co-Head of Ares Alternative Credit, Ares Management
problem. It's great seeing you again. Thank
Tom Lemmon, Global Securitisation Editor, GlobalCapital
you. Thank you all for listening and thank you. Joel, thank you Tom, thank you Joel, and thank you to Aries for their support of the summit today. We now have a refreshment break, and we'll be back in here at 1145 for the rise of non bank lenders in fund finance panel. Just a gentle reminder that. Panel is off the record. Thank you and see you soon.