Michael Arougheti Talks Tariffs, China
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There's no business like small business. Hiscox Small Business Insurance. Bloomberg Audio Studios. Podcasts. Radio. News. Welcome back. We are here at the Milken Global Conference, joined now by Aries Management CEO, Michael Arrighetti. Thank you for joining us here on set. It's great to be here. Good to see you again. A lot of conversation.

There's a lot of conversation going on. We have to start with tariffs. I mean, it's kind of taking up all the air in 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 markets are going and how it affects capital flows in our business.

I think the good news generally from an ARIES 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 first order impacts, we're pretty unaffected.

Obviously, the longer that these trade imbalances go on and the trade war goes on, it affects everybody just in terms of the economic impact. And that's what we're keeping an eye out for. But so far, we're just kind of in a wait-and-see mode. And hopefully, we'll get some information in the next week or two that will give some people some clarity. A lot of wait-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

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 economic superpowers, the U.S. and China? Of course, a lot of investors have looked more and more

to China, to Asia more largely. But of course, the tariff 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.

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, nearshoring and reshoring.

China plus one. So there's always going to be puts and takes. The reality is, is very few investors, U.S. dollar investors have been investing into the China market over the last many years. So we're not really seeing that significant amount of disruption. 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 of fundraising. We pulled in about $93 billion of new AUM. This first quarter, we just had earnings yesterday. We added another $20 billion to the dry powder pile. We have about $145 billion to invest. I think what we're doing differently from a positioning standpoint is, number one, we have a broad...

diversified global business. So I just think that we're giving investors a lot of choice as to where they want to play and what risks 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 goes back 20, 30 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 and corporate, we're generating 12 to 15 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 low to mid-teens returns without having to worry about that equity risk premium. 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 widening. As I talk 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 golden opportunity that's forming to deploy larger and larger dollars given how much valuations have corrected. What does that opportunity look like? I think we now, having been in business for 30 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 volatile 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 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, you know, around the halls of areas, we're actually quite excited about the future. 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 secondaries.

Some of that is their own liquidity concerns that we're hearing about. But also, Mike, the private equity industry has been holding on to assets for years. The IPO window has not opened in a meaningful way. This was supposed to be the big year. It didn't happen. Not really yet. M&A also pretty stalled. What does that mean for the private equity industry? Can they keep borrowing?

to keep the party going? 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. 60% of that private equity is four and a half years old 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 in the existing portfolio. But you can't do both, and that's where secondaries comes in. So we're seeing significant demand from the GP community as well as the LP community to kind of figure out how to recapture some of that $3 trillion and get it back to investors. If 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 in the existing portfolio? And that's just a dialogue. And GPs and LPs are all going to be in a different position.

depending on their liquidity or the age of their portfolio or, frankly, their performance in the underlying portfolio. It's certainly the topic of the day, and Aries 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 Arrighetti, of course, the CEO of Aries here at the Milton Global Institute. Switch to Verizon Business and get more from your internet without paying more for your internet. Get LTE Business Internet starting at $39 a month when paired with select business mobile plans. That's unlimited data.

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