Dispelling Private Markets Myths with Ares' Brendan McCurdy

Hi, good afternoon, good morning everybody. Delighted to be joined today by Brendan McCurdy. Brendan is the Managing Director, Global Head of Investment Strategy and sits within ARIES Wealth Management Solutions. During the purpose of this discussion today, we're going to be going through and dispelling three important myths that currently reside within the industry.

Brendan will very clearly articulate maybe how those myths should be dispelled and why it's important in the current environment. So, Brendan, just a quick introduction from you on your role. Yeah, perfect. Thank you.

And it's great to be on. So myself and my team, we sit in on investment committees across the firms. We get to see the deal flow and the pricing that's happening across private equity, private credit. infrastructure and real estate.

And with that view, then our role is to go out and try and actually pull back the curtain and provide a lot of clarity, give access to exactly what we're seeing so that investors and especially investors in the wealth space can have a better sense for exactly what's happening across those asset classes, and then think about how to potentially bring them into their portfolios and the financial planning that they're doing. Fantastic. Well, this is really important, I think, given the current environment.

I'm looking forward to getting through. Let's begin with myth number one. Myth number one, private markets are alternative and hard to use in portfolios. Now, the current perception is that private markets are very complex, very liquid, opaque, and really only suitable for large institutions who are willing and able to lock up capital for very long periods of time.

Maybe let's introduce the reality, Brendan, today. Yeah, thank you for that. I do think although we see a meaningful slice of the professional wealth management industry really embracing and using private markets in a meaningful way, We do, of course, see a broad set of advisors and private bankers that still haven't started down that path yet. And so I'd say the reality is that private markets are increasingly core portfolio building blocks.

A couple of the ways that we think about that. First of all, when you think about private equity or private credit, they're still just equity and credit. So at the end of the day, we believe equity is equity and credit is credit. Some are publicly traded on exchanges and some are not.

But at the end of the day, they still represent the same sorts of risks and return drivers in the portfolio. And therefore, private equity, we believe, should be viewed as part of the total equity portfolio and private credit as part of the total credit or fixed part of the portfolio. Now, in terms of the difficulty of use, there's been an incredible evolution in structures. So fund structures have really evolved over the last 10 years.

So today we're in a place where there is better reporting, more predictable cash flows. You don't have some of the issues around having to have subscriptions and redemptions that take capital calls in many years to complete. And you don't have the same sort of issues with some of the traditional drawdown structures where you have a lot of expenses on what's called the J curve up front. And in strategies like private credit and secondaries we find can really complement public market portfolios by providing income and diversification and potentially lower volatility across portfolios So we really view the distinction as not being what we don't really call them alternatives.

There are still alternative asset classes like cryptocurrencies and trading strategies, but really when it comes to private equity, private credit, real estate, and infrastructure. We view these as being public and private. They're not traditional versus alternative. Let's move to myth number two, which is very germane today, a lot in the media.

So myth number two, private credit is overcrowded, too much capital chasing too few deals. So the current perception is that private credit really has become the trade of the moment. Too much money has poured in, spreads compressing, and returns will inevitably disappoint. That's the perception.

What would you say is the current reality from ARI's point of view? Thank you for that. Yeah, in our view, the reality is that private credit growth has really been structural. It's not a recent popular flavor.

It's not something cyclical, private credit has really grown, not because of excess risk-taking, but because it offers superior value and a superior value proposition to borrowers. So from our point of view, the key drivers of private credit growth include, first of all, that they're fully bespoke. They're very customized. So as a lender, we're working directly one-on-one with the borrower, which is just a company typically.

And what that means is that we get to design a loan package that works for them. We don't have to worry about having certain loan terms that are going to work when we go in to turn around and sell it into the public markets because we're not doing that. There's alignment between the lender and borrower over the full business life cycle because we hold the loan on our books and our investors hold the loan. And so there's that alignment that's there.

And there's also more flexibility between a private lender in private credit and the borrower. So we don't have to worry about rigid traded market structures or bond structures because we get to customize the loan. We get to have flexibility and work with the business to try and make sure that business is staying healthy and they're continuing and able to properly pay the loan back. So it's actually the structure that's typically nicer for the lender and the borrower.

I would also reject the notion that the expansion of private credit reflects any sort of deterioration in borrower quality. Really, as I look at loans that have been made over the last bunch of years, there's actually been a reduction in total leverage in a lot of these loans. So loan leverage has come down. As you look at leverage across the total economy, so like as a percentage of GDP, leverage across the economy has remained relatively stable.

So it's really just been a story of market share shifting away from banks and liquid markets and moving more towards private credit. So it's been a displacement rather than some sort of massive growth in credit. Now, from an investor standpoint, private credit offers, in our view, and historically has shown a durable return premium of somewhere between 150 and 300 basis points So one and a half to three percentage points of extra return per year and extra income per year over the liquid fixed income markets And the structural illiquidity is designed to enhance outcomes And it in our view not a flaw to be engineered away.

So we really believe private credit is an asset class that's meant to be held through cycles. There will always be periods of volatility and dislocation. We've seen that historically, and we've lived through them personally. And we've found our own lived experience is that these tend to be the best deployment opportunities.

And anyone with dry powder can really capture extra spread in income. And just as kind of a side note, we've seen many institutional investors actually increasing, not reducing, but increasing their private credit exposures during this period of stress. So we're quite positive on the asset class overall. Let's go to the third myth, Brendan, which let's shift over to private equity.

So myth number three is that private equity secondaries are just about buying at a discount. The perception is that secondaries are just opportunistic trades that only really work when assets are available at steep discounts, maybe because of forced selling, and actually offer very little value once pricing tightens. That's the perception. What would you say is the actual reality today and why that's important?

Yeah, there are a couple of interesting angles on that question or that perception. And while I would say that entry pricing can matter for traditional secondaries, secondaries are fundamentally about portfolio construction and risk management and not just discounts. So traditionally, secondaries can provide exposure to seasoned assets and they give you a greater visibility into performance. They can offer shorter duration because you're already many years into the investment and can often offer earlier cash flows.

They can complement primaries by balancing the, is referred to as the blind pool risk, but basically because you're getting with secondaries into a portfolio where you already know the assets that can help to balance normal primary investments where that's not the case. I mean, you'll often get companies that are further along in their value creation journey with secondaries. So secondaries traditionally have given roughly the same return as private equity, but with lower risk and lower volatility because there's some more of that certainty.

But one of the really important points, in addition to that sort of portfolio construction is an important use for secondaries, is that there's actually been a big evolution in the space over the last, let's say, roughly eight years, where the space has evolved from kind of traditional liquidity solutions, whereas a secondary investor coming in and providing liquidity for the LPs or the investors. And now so much of the marketplace is about providing liquidity for the GPs, for the private equity managers themselves, and actually being a capital management tool for them.

So now about 50% of the market of those traditional secondaries where discounts are an important component, not the only component, but an important one. And now 50% of the market is actually providing liquidity to GPs to allow them to own is often their best assets for longer and to be able to hold those for longer, to compound for longer and not be forced to turn around and sell the companies that they really like to the next private equity manager or be forced to try and IPO them particularly into a less favorable IPO market So what you find with those GP secondaries and they often referred to as continuation vehicles as when you have exits or a activity constrained, general partners are really using secondaries in a creative way to deliver some liquidity to their investors to send distributions back to them and allow them to hold those assets for longer.

And I'd say in particular right now, it is those continuation vehicle or GP-led secondaries that we're probably most positive on because we do see strong buyout, private equity risk-adjusted returns out of them. You're still getting some vintage asset and line item diversification. And that's where we see right now the best returns. And then I think it's very nice if there is any kind of a market dislocation or you see discounts widened out, it's a great time to come back into the market and be that provider of liquidity to the LPs.

But right now it is those GP-led transactions that we really like the most. And I think it's using those two different types of secondaries together to create a dynamic portfolio. And then the diversification benefit of using secondaries alongside your primary private equity holdings, that becomes really powerful. What would be very useful, Brendan, is maybe just to summarize based on those three myths that you've very kindly outlined today and explained.

I wonder what key takeaway would you offer on why this is important to ARIES Wealth Management based on the fact that these myths currently exist and really why it's been important to explain the actual reality of the situation. Is there a final message or key takeaway that you would offer? Yeah, well, listen, I'm so happy to have a chance to address these, what we feel are myths head on. And I do think some of these myths and perceptions can miss the bigger picture, which in our view is that private markets are no longer niche or opportunistic and are really becoming intentional tools for portfolio construction.

They offer ways to diversify risk, to improve cash flow, to improve cash flow visibility, and to help manage volatility and to help shape outcomes more deliberately and to bring diversification in a way that is more difficult than just using public markets alone. And ARIES really focuses on making private markets of institutional quality and scalable and portfolio relevant and help individual investors, private wealth investors, use them intentionally rather than tactically. We do believe that is the best and most powerful way to really take advantage of their compounding nature over time.

As a firm, we're here to help educate, to help give access to what we see going on and to really provide that transparent look. So I love that we've been able to talk through these. And for anyone that would like to continue to hear more from us, please do follow us on LinkedIn and on accessareas.com.

Really appreciate your time today and wish you the very best for the remainder of 2026. Thank you. Same to you. Thank you.