Perspectives: The Ares story

Speaker A: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends and opportunities. Make sure you're subscribed to stay up to date with new episodes. Thanks for listening. And now onto today's show. Welcome.

Speaker B: Thank you for tuning in to the Perspectives podcast series. I'm Danielle Johnson. I'm responsible for our institutional clients globally. I'm here with Michael Arighetti, the CEO of Aries. So pleased to have you here in Hong Kong. I do want to start with your origin story. Um, have your listeners learn a little bit about yourself.

Speaker A: Sure.

Speaker B: What motivates you, what drives you? Um, how you got into this business, and, uh, what inspired you to start Aries?

Speaker C: I kind of fell into finance. I found myself. And because I was graduating early, a lot of my friends were not in the look for job programs. So they were working and having fun, and I was kind of, oh, wait, I need to go figure out what I'm gonna do. I applied to a couple jobs in banking. Didn't get any. So I found myself almost graduated without any gainful employment. And I actually got a call from a friend of mine who had graduated the year prior, who worked at Kidder Peabody, and said, hey, we're hiring, and I know you're looking. Do you want to come and interview for. Interview for a job? And I actually got a job as an analyst in the MA group at Kidder, not knowing anything about what that meant. So I found my way to Wall street. And I still get this thrill around the business. I love the energy about it, like, just the pace of it and the markets. Um, I love. And this is why I kind of moved into private markets the way that I did. I love this idea of learning how the world works. And I know this sounds crazy, and I say this to my kids, who are. One's a musician, one's an artist, and they don't want to hear from me about finance. But at the end of the day, the markets and finance underpin everything from politics to sports to technology. And so when my mind opened to that and I realized that I was thrust into this world where I was meeting all of these entrepreneurs and business. Business owners and hearing their stories.

Speaker B: And then how did you. How did you found Eric? How did you find it?

Speaker C: Really lucky. This was. I. So I was an M and a analyst, which back. That was a tough job. I literally was working 120 hours a week. My apartment was across the street from the office. So for. For two years, I basically lived in a 50 yard box. But that kind of training and I still to this day think it's so valuable to kind of work that hard and know what that feels like because after you do that, everything else just feels simple. And then towards the end of my analyst career, the guy that I was working for left to start a merchant bank that was backed by a French bank, uh, which was called Indo Suez Capital, which now is Credit Agricole. And at the time it was this really entrepreneurial group of people. It was probably 12 of us that were investing the bank's balance sheet into the early days of private equity. So we were making middle market loans to private equity companies, we were doing equity co investments, we had a CLO business, we had a fund of funds. It was quite kind of a mini version of the modern day multi asset class asset manager. Um, and that's where I really saw private markets upfront and close and really built a lot of the relationships that form the basis of my career today. There's this view that private credit just kind of came out of nowhere. And I always try to explain to people, actually we've been doing this for a long time, almost 35 years and we've been tracking the growth of the private equity markets and the development in the bank markets. But um, it was a little bit different then because it just wasn't as scaled, it wasn't as, uh, well understood and it was still being done within a bank. But what's so unique about the way that we were structured is the bank basically gave us an allocation of capital that we were investing on their behalf. So it felt more like what an institutional fund business feels like versus working for a bank. And then, um, I actually got to move to Paris for about a year and a half because my mother, my mother was a French teacher and I had studied French in college and so was fluent in French. Okay. That business ultimately, um, grew to be quite substantial in its own right. And then we left Indo suez with probably 40 some odd people and took the business to Royal bank of Canada where we were tasked with building up their principal investing business and their leveraged finance business and loan sales and trading and things like that. Our clients were coming to us and saying, can you lend me five times cash flow at X percent? And I would go into a risk committee at a bank and say, we have this great private equity client that wants a loan, but it's going to be LIBOR 500. And the first thing that would say is, what's wrong with it? You say, well, what, what do you mean, what's wrong with that? I can price it at Libor 300 if that would make you happier, more comfortable. Right. So there was a lot of prescriptive, um, structuring views that exist in the banks for the right reasons, because they're 10 times leveraged, they're highly regulated, there's an asset liability mismatch between deposits and the balance sheet. And so, having spent as much time within banks as we did, we got to a Point in 2002, 2003, where the private equity business was now getting really scaled and demonstrating continued success. And the banks weren't really able to keep pace with their needs. And that's when we kind of had the epiphany that maybe there's a better way to do this. And so we actually went out on our own in 2003 with my partners, who are now still my partners at Aries, to start a, uh, private credit business. For the first maybe 10 years of Aries, when we were really building these private markets businesses, the institutional community didn't quite know where to put it. So similar to the banks, the boxes. Boxes, liquid traditional fixed income, 4% public equities, 60, 40. And then there's alternatives, which is everything else.

Speaker B: So when did it inflect? When did it get its own box?

Speaker C: I think it got its own box post the gfc. So we had been meaningfully scaling private credit and other ancillary businesses leading up to the gfc, largely driven by client appetite, meaning people who wanted dollars from us to grow their businesses. And then post the gfc, I think people understood, given just how much available investment there was for folks like us, that we were able to translate what our clients were asking us for on the ground from a financing standpoint to an investment outcome that made sense for, for clients. And while we were going through that transformation and while the private equity firms were transforming, the institutional investors were also changing the way that they thought about the world. And I think that's why the GFC did it. Got it because they realized coming out of the GFC that a lot of the things that they thought were true about the performance of the liquid markets proved to be not true. Right. They had all these liquid securities that proved to be illiquid. They found that a lot of the things that they thought were not correlated were correlated. And so they began to restructure their businesses away from a traditional public equity, public fixed income alts to thinking about the world in terms of equity risk and credit risk. And we began to see a lot of the Large pension sovereigns, insurance companies realigning their teams to think about public and private in the same conversation. And that's when you start to have conversations about illiquidity, premium and non correlation, all those things. But it was all of these cross currents that seemed to have come together after that.

Speaker B: So pensions, sovereigns, insurance companies, um, when you look, what does your investor base look like? Um, how has it evolved?

Speaker C: So aries manages about $625 billion of assets. Um, we have over 3,000 institutional clients. And that is everyone that you would expect. Large pension funds and all the major sovereigns and insurance companies and small endowments and foundations. Uh, but we also have a large and growing individual investor base too, going back to the early days of our traded bdc, now to our very broad, uh, wealth platform. So I don't know how many hundreds of thousands of individuals are now investors with us, but it is now this very broad global institutional and individual investor base which drives home how profound the responsibility is for us to show up every day and generate return. And that was also, I think, for our business, a real unlock too, because I think in the early days of private markets, most people were, if you were an early private equity practitioner, my job is to show up and maximize return on this small fund. And now we're all fairly large global companies that have real reach and real opportunity for impact. And we serve retirees and savers all over the world. And that just changes the perspective, which I'm thrilled about.

Speaker B: Yeah, I know. Fiduciary duty to all those investors. And we had this institutional event here. It's pivoted to our wealth event here. How do you think about that, that wealth channel? It's been a tremendous source of growth.

Speaker C: I'm such a huge believer in the growth of the wealth business because it provides access to alternative product to the individual investor. And the reason I'm excited about that is for decades institutions were getting all this excess return. And the only way the individual was really getting it is if they were a beneficiary in a plan. But it was impossible for them because there was no access point for them to actually own it directly. And now that the world is moving from defined benefit to defined contribution, and you've had all of these trillions of dollars of wealth accumulated in the markets, the idea that we can now package what we think is some pretty unique investment product for the individual, it's exciting and it's liberating and it's in the very early innings. I think the challenge is similar to the Transition I talked about with the institution going from 60, 40 to credit and equity, and the individual investor and their advisor is going through a similar evolution and education process. And we're in a moment now where, for example, in the private credit part of the wealth space, there's a lot of noise and misunderstanding. So flows are probably slowing there. But then in infrastructure and real estate. And what about private equity?

Speaker B: What about data centers?

Speaker C: Data centers, People understand it. It's funny because that's something that is also prevalent, also very misunderstood. I think we're in the very early days of the evolution of this market. Like any market, as it develops, you're going to have fits and starts and bumps. When you just think about the amount of wealth in the hands of the individual investor today and the shift away from defined benefit, it has to accelerate. And when I think about folks such as yourself who are really putting the appropriate amount of time, energy resources behind education and access, it is accelerating and should continue.

Speaker B: Yeah, I know we jumped around a lot. Um, we talked a little bit, a bit about the evolution of the business.

Speaker A: The.

Speaker B: Then, the now scale. What do you think you need for scale? What does scale mean in a credit multiasset platform?

Speaker C: Yeah, scale. So it's one of the things that we had to convince ourselves, but also our investors was that scale benefited performance. We understood early origination drove the business because ultimately, what people pay us for in private market investing is access to companies and assets that they can't find anywhere else. And the only way that you could do that is if you put real resources in local markets against that opportunity. And so I think our clients came to understand, because we were able to originate these really unique investments for them, that what scale gave us was the ability to build these networks in a way that very few people couldn't. And because we did it early, we had this incumbency benefit from those relationship networks that just kept amplifying the competitive advantage.

Speaker B: So that is the moat.

Speaker C: That is the moat. Um, and it's very hard for people to understand because this business, at the end of the day and your side of the business and ours is still a relationship business.

Speaker B: Absolutely.

Speaker C: And relationship businesses are predicated on building deep trust through experience with people. And so we had been doing this for, uh, 15 years before people realized that this was a thing. And then by the time they did, we had so many transactions and positive and difficult experiences under our belt with a lot of these clients that we were able to lean into it, I think, in a way that other people.

Speaker B: You were the early Mover. And now a lot of folks have joined the party. Where do you see as the future of the business in terms of new products? I know you've gotten into sports investing. Um, maybe tell us a little bit about that. What opportunities you see. Um, I don't know if we mentioned it on this pod, but you do own a baseball team in Baltimore?

Speaker C: I do, yeah. So it's nice. It's one of these nice intersections of my personal life and passions and what we do professionally. We had personal investments in sports and we at Aries had been investing in and around sports and entertainment for 15 years before we launched our sports investment business. And this happened so quickly. But In March of 2020, Covid hit. And for those of us who had investments in sports, it was kind of a moment which is no one's going

Speaker B: to show up, no one's going to convene, no one's going to show up.

Speaker C: No concerts, no, you know. And we very quickly said, okay, well what does that mean? And what it meant was you were going to have a lot of people who owned assets, sports teams or stadiums and arenas, or ticketing platforms or stadium hospital that were part of this huge global ecosystem that we're literally going to be frozen.

Speaker B: Yeah.

Speaker C: We called a lot of our strategic limited partners and said, hey, we have an idea. Why don't we come into this market with a creative solution for people who are asset rich and cash poor or who need a liquidity bridge that can't be met, uh, in the markets. And it started off almost as this kind of solutions business. But what was so special about the time was at that moment institutional capital wasn't allowed to invest in sports leagues.

Speaker B: I didn't appreciate that.

Speaker C: So before 2020, for most of the sports leagues it was banks that were kind of lending against league wide facilities and rich people and their friends. Because we had relationships with teams and leagues spent the better part of the first half of that year effectively proselytizing getting institutional capital to come into sports. And we got approved by the major leagues to bring capital in. We raised a $4 billion plus pool of capital to do it. And we very quickly got into the business of investing in some of these assets. But back to my comment about origination. In order to do it well, mhm. We started to go across the platform. So we created teams from private credit, private equity, real estate, asset based finance, and married them to different leagues and different geographies because there's meteorite securitizations that would be a, an ABF deal There's a stadium renovation or stadium adjacent redevelopment that be a real estate deal. So we kind of aligned the entire capability set of the platform against the various leagues and went out again and built this kind of origination moat early. But what is amazing about the world today versus what it was 20 years ago, people catch on a lot faster and they can catch up a lot quicker. So there's a sense of urgency when you're building these businesses to accumulate those competitive advantages quicker. Because I think people can be fast, faster.

Speaker B: How do you do that?

Speaker C: You move quickly, um, you think about how to organize to protect what you have. Move the right people into the right seats, get the right type of capital. So one of the things I think that we did well was rather than just go in with equity, we went in with debt, structured equity, equity real estate, all of the above. And so we were giving people a much differentiated view on liquidity solutions. And I think we're available in the market. But I mentioned that because that's a huge business for us today and didn't exist five years ago. So when people ask me like, what's next?

Speaker B: Well, that's what I was going to ask you. You ignited the credit market, the private credit market, you've ignited the sports market. It sounds like what's next?

Speaker C: I think what's next? And I'm not just saying that because we're here in Asia. We are spending a lot of time thinking about methodically bringing the business here. Because if you think about the history of ares, we started off in the US market and a lot of the patterns we saw there in terms of just what was happening in the banking system, the growth of private equity, the growth of the loan and bond market, it all kind of started to happen in Europe right before the GFC as well, and then accelerated. And luckily we were there early and kind of caught the wave. And uh, that's starting to happen here. Right? You're beginning to see private equity make meaningful investments in growth, particularly in developed parts of this market. You're beginning to see the liquid fixed income markets, you know, mature and evolve. So we've been pushing very aggressively to create capability. So I don't know if that's like what's next, but this is a place

Speaker B: where music to my ears. Being at hsbc, I'd love to end focusing a little bit on leadership, culture and values. Um, our listeners got a little bit of a sense of what makes you tick and of uh, your North Star. What they probably don't know is that your firm has A charitable foundation. Tell us a little bit about that.

Speaker C: Yeah. Thank you for asking about it, because I don't get the chance to talk about it as much as I'd like. I got a call from a friend of mine who I'd known for years. This was probably seven or eight years ago. He was a portfolio manager at one of our competitor, uh, firms. And he's like, I want to do something different, um, and I think I want to do it at Aries. But I have one request, which is I want to take 5% of the promote. So 5 of, uh, 20, and put it towards philanthropic causes, because I want to align our performance with the impact that we can have. But I want Aries to match me. So we said yes, and that was kind of the first thing that we did. And we immediately saw how energizing it was for his team, uh, because they all said, I'm not like it gave them purpose. It goes back to the conversation we were having earlier, just about the beneficiaries of the plans that we manage money for. This took purpose to a whole new level. So we stood up the Aries Charitable foundation, and we committed that we were going to take 1 to 5%, depending on the fund, and put it into the foundation and align the foundation's work to the types of things that we really think that we can make a difference on. Financial literacy and financial empowerment, entrepreneurship, um, economic opportunity. And we started to do these big tentpole, uh, grants to try to really impact the communities that we live and work in. And it's grown to be quite substantial, obviously, given the. Fortunately, the good performance that we've had. And it's electrified the workforce. So people are contributing Promote, and they're contributing equity and time. And now they're sitting on boards of these grantee companies and learning the business

Speaker B: of philanthropy as a multiplier effect.

Speaker C: It's incredible. And then, and this is the kicker, uh, the same gentleman created an umbrella organization called Promote Giving. So anyone who's listening to this, I would encourage you to learn more. And he went out to our friends in the asset management community and said, look at. Look at this model that we're executing on, where we're aligning our performance to our philanthropy and a real focus on

Speaker B: education and health care.

Speaker C: Yeah. And we want you to take the pledge. Just pick one fund and say that you'll allocate Promote to philanthropy. We don't want to run it for you, but we want you to experience what we're experiencing and for you to get back the way that we are. And I think he's now signed up a dozen asset managers who have taken the pledge and now they're out, uh, proselytizing. So the goal back to amplification is that what started with one fund and then became our foundation, which is now hundreds of millions of dollars of capacity, is now expanding broadly into the asset management world. And it's incredibly gratifying. It's reflective of the culture, but it's also reinforcing and building the culture too. So it's probably one of the things I'm most proud of.

Speaker B: That's terrific. That's terrific.

Speaker C: Thanks for asking about it.

Speaker B: Absolutely. And I think we should end on that note because it's so impressive. Thank you all for tuning in. Thank you, Michael, for your time and joining us in Hong Kong.

Speaker C: Always good to be with you.

Speaker A: Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.