Ares Management's CEO on Public Markets, Private Equity, and More | At Barron's

Key Concepts

• Private Markets Investing: Investments in assets that are not publicly traded on stock exchanges, including private equity, real estate, infrastructure, and private credit.
• Alternatives: A broad category of investments that differ from traditional asset classes like stocks and bonds.
• Assets Under Management (AUM): The total market value of assets that a financial institution manages on behalf of its clients.
• Democratization of Finance: The trend of making investment opportunities, previously only accessible to institutional investors, available to individual retail investors.
• Secondary Markets: Markets where existing investors sell their stakes in private funds or companies to other investors.
• Swenson Model: A university endowment investment strategy, pioneered by David Swenson at Yale, characterized by a significant allocation to alternative assets.
• Alpha: Investment returns that exceed a benchmark or market return, often attributed to skillful stock picking or investment strategy.
• Beta: The measure of a stock's volatility in relation to the overall market.
• Non-correlated Outcomes: Investment returns that do not move in the same direction as traditional asset classes, offering diversification benefits.
• Liquidity: The ease with which an asset can be bought or sold in the market without significantly affecting its price.
• Illiquidity: The opposite of liquidity, where an asset cannot be easily bought or sold.
• Compound Annual Growth Rate (CAGR): The average annual growth rate of an investment over a specified period of time.
• Valuation Multiples: Financial ratios used to determine the value of a company or asset, such as price-to-earnings (P/E) ratio.

Ares Management: A Leader in Private Markets

Michael Aragetti, CEO of Ares Management, discusses the firm's position and strategy in the rapidly growing private markets. Founded in 1997, Ares manages nearly $600 billion in AUM across private equity, real estate, infrastructure, and private credit. The firm employs 4,000 people in 40 offices globally, providing a unique perspective on the real economy. Despite a lower public profile than some competitors like KKR or Blackstone, Ares has demonstrated strong stock performance and a higher valuation, which Aragetti attributes to strong management and a clear strategy.

Key Differentiators and Strategy

Aragetti highlights Ares' success in simplifying a complex industry for investors. Their strategy focuses on:

• Clear Articulation: Explaining the firm's role in the global economy, growth drivers, and value proposition to both institutional and individual investors.
• Clean Financial Profile: Operating as a pure-play asset manager, managing capital for sovereign wealth funds, pension funds, insurance companies, and hundreds of thousands of individual investors. This contrasts with peers who have diversified into insurance or balance sheet-heavy models, which Aragetti believes can create confusion.
• Consistent Growth: Ares has achieved approximately 25% compound annual growth for the past 25 years across all market conditions. This predictability and consistency are key underpinnings of their valuation in the public markets.

Perspective on Public Markets

Aragetti expresses a cautious view on the current public equity markets, stating they are "fully valued" rather than overvalued. He notes several trends making active investing more challenging:

• Market Concentration: A significant decrease in the number of public companies and a concentration of market capitalization in the top 10.
• Passive and Algorithmic Trading: The rise of passive investing and algorithmic trading has altered market economics and research.
• Difficulty in Generating Alpha: These structural changes make it difficult for traditional public equity managers to generate alpha, leading to outflows as investors seek beta exposure.

While a proponent of long-term equity investing, Aragetti believes individual stock picking is increasingly difficult. He acknowledges the enthusiasm around the technology sector and AI as potential catalysts for value but emphasizes that current valuations are well above historical averages.

The Democratization of Private Markets

A significant theme is the increasing access of private market investments to public investors, including those in 401(k) plans. Aragetti strongly supports this trend, believing that individual investors should have the same access to differentiated investments as large institutions. He emphasizes the importance of appropriate governance and investor education.

He clarifies that while 401(k)s are a new channel for individual access, many large institutional investors (state plans, insurance companies) have long invested in alternatives. The key is providing individual investors with the opportunity to opt into these investments within their retirement plans through the right structures.

Aragetti refutes the notion that private markets are moving to retail because institutional markets are saturated. He argues that the constraint on growth in private markets is the ability to create new assets (building properties, buying companies, etc.), not a lack of demand. The expansion of distribution channels will diversify funding but won't overwhelm the traditional institutional business.

Sports Investing: A New Frontier

Ares is actively involved in sports investing, including a part-ownership of the Baltimore Orioles. Aragetti explains how the COVID-19 pandemic acted as a catalyst for innovation in sports capital structures. Previously, sports investing was dominated by bank capital, league guarantees, and wealthy individuals, with strict prohibitions on institutional investment.

The pandemic's impact on liquidity for team owners led to conversations about more creative financing. This missionary work and relationship building have opened major sports leagues to international institutional investment. Aragetti highlights that sports assets offer:

• Non-correlated Outcomes: Their performance is largely independent of traditional 60/40 portfolios.
• Strong Compounding Returns: Sports assets have compounded at close to a 15% rate of return over the last 15 years.

Within five years, a previously "uninvestable" market has become a multi-trillion dollar opportunity for both institutional and retail investors.

University Endowments and Private Equity

Aragetti addresses the challenges facing university endowments, many of which have significant private equity allocations. He notes that endowments, including Yale (known for its Swenson model of heavy private equity investment), have been utilizing secondary markets for liquidity. This is more for risk management in the current environment than due to distress.

The combination of reduced research funding, endowment taxes, and fewer international students has created a new paradigm for universities. Forward-thinking institutions are liquidity planning. Aragetti views the use of secondary markets by endowments to sell assets at fair values as a demonstration of the durability of private market exposures. He believes the anxiety in this market segment is lower than it was a few months prior.

The secondary market is a growing area that provides liquidity for both endowments and firms like Ares, and funds created from these transactions can become accessible to retail investors. This process creates liquidity in illiquid markets, enabling continued growth in private markets. Aragetti reiterates that the premise of private market investing is accepting illiquidity for higher returns, and the public markets often overcharge for liquidity, which can disappear when needed most.

Ares' Growth Strategy and Guidance

Aragetti confirms Ares' ambition to double its AUM. He points to the firm's track record of meaningful double-digit growth rates. A key factor underpinning Ares' valuation and attractiveness as a public company is its practice of providing five-year guidance, a rarity in the public markets.

Aragetti supports the idea of moving away from quarterly reporting, believing it hinders long-term business planning. He states that Ares' five-year guidance projects $750 billion-plus in AUM, with annual growth of 16-20%, and the firm is on track to achieve this.