Michael Arougheti Talks Tariffs, China

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Welcome back, we are here at the Milken Global Conference. Join now by Aris Management CEO Michael Arraghetti. Thank you for joining us here on sech Good to see again. A lot of conversation going on. We have to start with tariffs. I mean, it's kind of taking up all.

The you heard of the room these days.

What do you make of the strategy that you're seeing from the administration and how you as an investor react to it.

Yeah, Look, we try to stay above the politics and just think about where the market served going and how it affects capital flows in our business. I think the good news, generally from an Ari's perspective, is the businesses that we invest in tend to be middle market service companies that have their customer base in local currency, local markets. So we don't really invest in a lot of companies that make things or have to grapple with supply chain issues or tariffs. So I think in terms of the

An eye out for.

But so far we're just kind of in a weight and see mode, and hopefully we'll get some information next week or two that'll give some people some clarity, a lot.

Of weight and see going around. What about the difference that you see between smaller and middle sized companies and the larger ones. There's a lot of concerns that there will be a disproportionate impact to the changes in policy for those middle sized companies.

Yeah, I'm not sure I agree with that.

The reality is most middle market companies are insulated from some of the large cross.

Border impacts of the tariffs.

And I could craft an argument that they're actually more protected in some respects from some of the issues that we're grappling with. That being said, if we start to head into a recessionary environment, they'll bear the brunt of it. So again, it could break either way, and we're just going to have to react to what the market gives us.

What do you make of the relationship that is changing between the two world economics superpowers, the US and China. Of course, a lot of investors have looked more and more to China, to Asia more largely but of course the tear of escalation has not been helpful to that movement. Do you think that there's some reversal there that will happen in the future.

Look, we invest money on behalf of institutions and individual investors all over the globe. We have a large business in the Asia Pacific region. You know, part of our business is benefiting in terms of people allocating to other regions of the world where we have capability and capacity. Our industrial logistics business is actually benefiting from some of the changes we're seeing around the global supply chain, near shoring and reshoring and China plus one. So there's always

You know, it's interesting at a time where a lot of people are looking around and seeing capital kind of frozen, you've actually raised a significant amount in places like private credit. What do you think you're doing differently here and what does it mean for your ability to bring in more interest from investors for the rest of the year.

Yeah, we were fortunate last year we had a record year fundraising. We pulled in about ninety three billion dollars of new aum this first quarter, we just had earnings yesterday. We added another twenty billion dollars to the dry powder pile. We have about one hundred and forty five billion dollars to invest I think what we're doing differently from a positioning standpoint is number one, we have a broad, diversified

They want to take.

As probably one of the pioneers or leaders in private credit, we're one of the few managers that actually has a track record that go those you know, back twenty thirty years where people can see how we've performed through cycles.

And then, as we often talk with investors, if you.

Look at our private credit strategies today, broadly across real assets in corporate we're generating twelve to fifteen percent rates of return right now, So on a relative value basis, I think with this amount of uncertainty on the forward path of earnings valuations, I think most investors are just finding it frankly easier, you know, to take shelter in the credit markets and make those kind of load of mid teens returns without having to worry about that equity risk premium.

Wait, what's fueling that return? Is it because rates have remained higher?

Ultimately, yes, it's clearly a reflection of the base rate environment. Rates are now starting to drift down, as everybody knows. But as they are and concerns about economic weakness are seeping in, credit spreads are starting to widen out. So while rates are coming down, I think people felt the asset class was going to be much more rate sensitive than it actually is because we're making up for that reduction with credit spreads.

As I talked to you and your peers, I can't help but think that there might be actually around the corner in the wake of some of this turmoil, a goals and opportunity that's forming to deploy larger and larger dollars. Given how much valuations have corrected, What does that opportunity look like?

Look, I think we now having been in business for thirty years, have seen that we actually have grown faster through periods of dislocation. So the fastest growth we ever had was through the GFC In terms of our profitability and our aum second was through the COVID pandemic, and that's a combination of just the unique structures that we manage the capabilities that we have.

So typically whenever we have voll.

To markets or dislocation, it creates opportunity. What's unique about this moment is the amount of investments that have already been made in the private markets at high valuations that were reflecting the lower rate environment is of a magnitude that we haven't seen before. And so the resolution, if you will, of all of the those assets that need to reset basis, we think is going to be a massive opportunity in places like secondaries, opportunistic credit, opportunistic real estate.

So secondaries is a good place to dive in for a moment here because you are seeing a lot of limited partners looking to sell. Some of that is their own liquidity concerns that we're hearing about, but also, Mike, the private equity industry has been holding onto assets for years. The IPO window has not opened in a meaningful way. This was supposed to be the big year didn't happen, not really yet. M and A also pretty stalled. What

I think they can.

I mean the financial incentives in private equity are aligned to long term equity value creation, and that may require holding these assets for longer. There's a real tension in the market now from limited partners who want to see a return of capital before reinvesting. But the opportunities for liquidity have gotten much more innovative and creative and complex.

So if you're a private equity GP.

Today, the entire market there's about three plus trillion dollars of private equity invested. Sixty percent of that private equity is four and a half years older or more. There's about a trillion dollars of equity that has not been invested, and so the challenge that the private equity industry is facing is do I take my trillion dollars and invest it into this new market where there's probably good opportunity, or do I use it to support valuation and growth

So you had to describe that tension between investors and their private asset firms.

What is it? I'm not sure there's a tension.

I actually think that most sophisticated LPs, which is largely all of them, understand the world that we live in, and I don't think that they want to see assets getting monetized at valuations that don't reflect the intrinsic value. That being said, they want to participate in this new vintage, and so if there's a tension, it's really how do I capture this wonderful opportunity set that you just referred to without compromising value creation and existing portfolio and not

Certainly the topic of the day and areas is right in the middle of it.

Mike, we have to leave it there.

We thank you so much for joining us here on set that is Mike Arraghetti, of course, the CEO of ares here at the Milk and Bubble Institute