[REPLAY] Kipp deVeer – The World of Private Credit at Ares (EP.329)
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My guest on today's show is Kip DeVere, a director and partner of Aries Management, the $30 billion market cap public company that manages $360 billion in assets, including $250 billion in credit. Kip joined Aries 20 years ago and serves as the head of Aries Credit Group, CEO of the public BDC Aries Capital Corporation, and a member of the Executive Management Committee.

Our conversation covers Kip's path to Aries, the business and credit markets 20 years ago, and the exponential growth of Aries since. We turn to the firm's research process across origination and sourcing, underwriting, investment targets, and portfolio construction. We then discuss Kip's perspectives on the credit environment, opportunities and risks, and close with a look at the future of Aries.

Before we get going, if you had a chance to watch the epic Wimbledon finals last week between Carlos Alcaraz and Novak Djokovic, you may have witnessed a changing of the guard after nearly two decades of dominance by the big three. Well, as they say, the more things change, the more they stay the same.

So while we watch a summer of tennis heading into the U.S. Open to see if the guard has in fact changed, and we simultaneously watch the Fed to see if the economic regime has also changed, one thing will stay the same. The incredible quality of guests on Capital Allocators. This summer, we'll go back in time like the early days on the show and feature a run of allocator legends.

By the way, when you hear someone say, as they say, just like I did, do you ever wonder who they is? I don't have an answer to that. But I do want to thank you for staying the same by spreading the word about capital allocators. Please enjoy my conversation with Kip DeVere. Kip, great to see you. Thanks, Seth. Thanks for having me. Why don't you take me back to your background in the early days?

I grew up in New Jersey in Short Hills, went to public high school there my whole life and ended up leaving to go to Yale. So I'm a Yale 94 grad. Had a great experience there. Had really no idea what I wanted to do with my life other than the fact that I grew up in kind of a finance family. My dad was a banker and I kind of knew what that was. And growing up in Short Hills, you know, a lot of bankers and lawyers and doctors. So those were all choices. Pretty broad perspective.

Education sort of took advantage of Yale, didn't major in economics or do any of that. I was a history major and showed up in the accounting class that everyone takes their senior year if you're declaring yourself potentially wanting to go be an investment banker. On a personal note, my mom was sick. She actually died of cancer the winter of my senior year at Yale. So that threw me in an interesting spot.

I recovered pretty quickly, but I was out of the whole process of banking interviews. March or April of my senior year, I had to figure out how to get a job. And I was fortunate and I sort of networked enough that I got in the JP Morgan analyst program through a little bit of luck and a little bit of hustle. So I spent three and a half years there, started on the banking side, didn't like it very much, but learned a lot.

by the early 90s. Banking was less valued advisor and much more transactional. I wanted to do something where I thought I could have a longer term view on generating some sort of return and had always been interested in investing. So I flipped over into a niche fund at JPMorgan Asset Management from '95 to '97.

And it was a good experience. We did everything from buying stocks to buying high yield to doing private deals. We did real estate stuff. So I got to work on a lot of really interesting things. I found myself there at a time where there was still very much, are you going back to business school or not type of culture? I wasn't entirely sure that I would stay in finance. Turned out that what I was feeling I was lacking was sort of like an entrepreneurial mindset.

desire to actually go do something, not work at a big place. And JP Morgan was not this huge, huge place that it is today, but it was still a large bank where as a kid in the business, I was like, I have really no ability to make an impact here. And I wanted to put myself into a situation where I felt I could be impactful. I was fortunate. I got into business school at Stanford, went out there, spent two years in California. It was a great way to get out of New York. I'd spent my entire life in and around New York, and it was definitely an eye-opener for

in terms of people, in terms of environment and culture. You're in the Valley and you're with this whole group of people who have very different mindsets. You know, it's a pretty special place. And I think I learned a lot about myself, but I also didn't catch the Silicon Valley bug. You know, I didn't catch the go be a venture capitalist or go work at a software company. What did it feel like when you were out in the Valley with all that tech stuff happening and you had kind of your early Wall Street background?

I'll give you the quick story, which is I told people that I was moving back to New York in 1999 to work in finance. And they were like, are you nuts? You know, what are you doing? Because about 25% of my class were CEOs of venture capital-backed funded startups. Most of them, as I made fun of them leaving the Bay Area, were not going to be real companies. And most of them weren't. And we were late.

Right. Graduating 99 with too many people with too much money and the Internet 1.0 by I guess that was the spring of 2000. Right. That it all sort of melted down. And we joke in 99 that we were we were the only class where no one did great right out of school.

95, 96, 97, 98. I mean, I could give you a couple of examples of folks that I know from those days who started a company as CEO, ran it for nine months and sold it for $200 million nine months out of business school. I'm not sure I believe they were lasting, but they were eye-opening. What do you think it was about you that you rebuffed that trend at the time? I don't know. I'm a little bit of a...

I think most of the time people who work with me and live with me would probably say, I do like to challenge the common, uh,

underpinning of what people seem to think. And look, the Valley is an incredible place in terms of the innovation and the intellects and all of that. But it's also a really tough place in terms of just crowd thinking. People really tend to kind of move in the same direction all the time. So I think just being a little bit of a contrarian, being a little bit of a skeptic. I mean, I run a credit business, so that's how my brain's wired. A little bit more for downside protection and a little bit less for

wild growth at any price. So how'd you find your way from business school into the credit markets? The simple answer is the couple of folks that I opened the New York office with, you know, we shift forward at Aries I've been working with for 20 years. So I went to work there with them, which was a place called Indosuase Capital that we had a boutique inside a French bank.

doing kind of what I wanted to do, deal driven, entrepreneurial, middle market companies. But we were way ahead of the game, I think, in terms of the playbook for direct lending and private credit. Right. There was still so much going on in the big banks. And we had all said, we don't really want to work in the big banks. We want to work with these smaller companies.

acquisitive middle market companies looking to grow. And a couple of guys who had left Drexel and Keter Peabody had set up this partnership in 92 with a French bank. So my long partners, Mike Arrighetti is the CEO of Aries today, Michael Smith and Mitch Goldstein were all there. I went to work there for the summer just to try it out and I loved it. But we were early days on the credit markets and it was all just beginning to happen. So what were the credit markets like back then? Very inefficient.

much less well understood. It's probably best to even try to lean towards the private credit piece of it, right? So the syndicated loan market was there, but was really developing from the early into the mid 90s. So it had developed a bit, but you didn't have these big multi-billion dollar levered term loans that you have today. The high yield market was still driving everything from the Drexel days in the large market, and you still had small high yield deals, which you don't really have today.

So over time, what we said we thought we could do was build sources of capital that could actually be long term, flexible, do senior debt, do junior, et cetera. But the terms were wildly different. Right. I mean, a senior deal was.

three and a half times levered with a six or 700 basis points spread to the risk-free rate. Mez deals were 15, 16% fixed rate coupons with seven and a half percent of the company in warrants that struck at zero. You charge five point fees. It was wildly inefficient. We had for a while, a single LP in the bank.

So they funded us doing everything from asset management to underwriting deals to we had a billion plus dollar private equity portfolio back then, too, as well as a fund of funds. So we were on to the right things in terms of creating the playbook. We just didn't have the right capital over time because like the U.S. banks, the foreign banks also started to figure out we kind of want to be in large cap deals where we can earn fees and not really use the balance sheet.

We and a bunch of others, some of whom are at Aries, some of whom are at Blackstone, some of whom are at Nuvi, you know, a bunch of people are all over the industry. We took about 40 or 50 people to the Royal Bank of Canada right after 9-11.

And they gave us really purview to do everything. Said, we want you to run Leverage Finance. We want you to run sponsors. We want you to build us a CLO business. It took everybody about three years to figure out that RBC had the same issues as every other bank. And I say that with respect because it's a really well-run bank.

but they just weren't ready to really commit to do what we wanted to do at the scale that we thought we could do it. Mike and Mike and I took our team through a process of exiting. We were managing about a billion dollar portfolio for the bank. We left with, it's probably 10 people, a bunch of who still work for us. We convinced the bank to pay us a management fee to manage those assets because they didn't know how to do it without us. And that was March of 04.

You know, the four of us are pretty close, look at each other and we're like, all right, what should we do now? You know, and I mean, there were thoughts of maybe we'll start our own firm, maybe someone will find us and there'll be a good partnership to do with someone else. And, you know, it was lucky we were, for the most part, 30 partners.

I was married with no kids. It felt like a great time to try to go do something on your own. That being said, I was also 30 with no money and having some stability and some intermediate step felt comfortable too. And that's when a couple of the senior folks at Aries that was exclusively at the time in Los Angeles approached us.

And they said, you know, we'd love to talk to you guys about potentially coming on board. We're going to go really commit to private debt. And we've done a bunch of deals with you guys and got a lot of respect for you. What would you think about that? So we entered into conversations with them probably March 04 and officially joined the three of us plus 10, call it in May of 04. So what was Aries when you joined 20 years ago?

Smaller. For us, it was perfect. To be honest, I'm coming up on my 20th anniversary. It's been pretty close to perfect for 20 years. But when we got there, they started originally two partners spun out of Apollo, right? So Tony Ressler and John Kissick, who founded the firm, were two original Apollo partners in LA. They left Apollo because their goal was to actually focus on credit.

And Apollo at the time was going a different direction with large cap buyouts and real estate and everything else that they've done. And Tony and John said, I think if we set up a firm that we start to build back out around credit, we'll be able to expand into different areas, whether it's PE or real estate or whatever else. But at the time when I got there, it was about 65 people. It was LA only. I think we managed probably $3 billion of CLO money, largely bank loans, but some high yield in there too, because they were all market value CLOs.

And Tony and Ben Rosenthal were getting close to closing a $750 million private equity fund. So for us as 30 year olds, we said, you know, starting your own firm can be really hard and really expensive. What does our risk tolerance look like? Do we actually have enough money to start our own firm? And the answer is no.

So it gave us a platform with some credibility, but also back to where I was earlier. It also gave us a sense in our mind to really be entrepreneurs and drive things and contribute to building the firm and its success and be there when it got going. So without going step by step, what is Aries today?

So Ares today is about 2,600 people. We have 30 offices. The rough breakdown today is about 700 in New York, 700 in LA, and about 400 in London. And then the balance are either folks out originating new deals or looking for clients. 360 something billion of AUM. But

But we're really still known as a credit first shop, right? We're about 250 billion of credit. And that kind of leads everything that we do. And it's led us into a bunch of other businesses. You know, private equity was there when we got there. But a lot of what we're doing in our private equity business is credit oriented.

Core buyout reserves probably a third to a half of what they do for restructuring and reorganization type situations where they'll go in and either buy debt or do some sort of hybrid security that they think will put them in a position to own a company. The other half of the fund is sort of just regular way buyouts.

And we actually run our entire distressed and opportunistic business alongside the private equity group. And they have 10 plus billion in capital. So a lot of the distressed investing we're doing, we're doing with long-term ownership oriented private equity mindset, not trading, you know, loans and bonds. We do that too, but it's a less significant part of the business. When you started, you mentioned there was a $3 billion CLO business. And then the beginning of private capital structure, um,

A bunch of different structures where you're putting these assets in today. How do you categorize all the different pools and types of structures? Everybody asks me the question, if I invest in private credit, which one's best? And the answer is, well, that has nothing to do with me. That has to do with you. That's an investor, right? It's what's best for you. But look, when we started and even thinking back to the end of days, private credit was not an asset class.

We went out on an early trip pre the BDC, even getting formed to a couple of our large California LPs that the L.A. crew had known a long time. And when we pitched them what we did, which was full capital structure, lending solutions in those businesses in the beginning to private equity, but it can be applied anywhere. The question was,

We wouldn't really know how to invest with you guys because we don't have an allocation and fixed income. It's illiquid. The returns are good enough that it might actually fit in our private equity bucket, but private equity doesn't have any expertise in credit. So the inefficiency even back then in '04 was that a lot of the investors around the world didn't understand the asset class and didn't know where to put it. And what's happened

Over now, a long period of time is different investors have scoped the asset class, different managers. You know, we like to think we're one of the leaders have built out enough of a track record that it's easy to audit. Our U.S. direct lending business, I can show someone a hundred plus billion dollar track record over 20 years through market cycles that's generated a net 12 or 13.

That's easy to underwrite if you're a large sovereign, if you're a pension. So you may have to come up to speed and learn, but you can do it. Back then, there wasn't enough information for people to really do that. When you think about the changes in this market over the 20 years you've been in the seat, have you gone from $3 or $4 billion to...

Literally 100 times that. Yep. What were some of those key inflection points with the acceleration of assets over the last 20 years? Most of the time for us, it's downturns. The private's market overall consolidate share away from the public markets during downturns. So '02 was kind of a more normal

Credit cycle, actually pretty similar, in my opinion, to where we are today, which is concerns about inflation, tightening monetary cycle, questioning certain business models. Back then it was tech 1.0 and telecom, too much leverage finance issuance in those sectors, etc.,

Credit markets and the banks sort of sell off and private credit makes its first push. And I think we were there to make that first push. But the same thing happened during the GFC. That was the most significant one. But the GFC, I think, really taught public market investors that they didn't have the liquidity that they thought they had in liquid markets. And that was really...

When a lot of really sophisticated investors, also because we'd been putting track record together, came to us and they're like, so this private market stuff doesn't seem to be quite as volatile, doesn't offer liquidity, but seems to offer pretty good longer term returns. Can you explain it to us? COVID was a bit of a inflection point, too. So it's usually downturns that actually accelerate inflows into our business.

How have you guys thought about organic growth and acquisitions? My partner, Tony, when he set the firm up, his belief starting the firm was if we can put some businesses alongside one another that all actually benefit from one another and make one another better, we'll be onto something. Right. And we started with liquid credit and that flipped into private equity, which then flipped into private credit.

Yeah, those were our three businesses for a long time really coming into the GFC. Over the years, we have been able to grow credit organically by hiring teams and doing it ourselves without acquisitions. So we've built out a very significant business in European direct lending with no acquisitions.

just by going over to London and hiring Brits to do what we did. And, you know, we opened in Stockholm and Paris and Amsterdam, you know, everywhere else. And we did that organically. We've also been building an alternative credit business, which is kind of a non-corporate lending business. We did that organically with hires. There are some things that we did do through acquisition that we said, if we're going to do it, we need to start big enough that it's relevant to a company like ours today. So the examples of that really were real estate,

So we bought Apollo's real estate business, gosh, in 2006 after the Macs were leaving and that was kind of coming apart. And that was a nice foundation for us, both lending and equity. And we've built on that, did another acquisition in real estate called Black Creek Group that managed at the time to private REITs. And that helped us bulk up. So real estate's been an area where we've acquired.

Infrastructure is another place. We recently bought a business from AMP doing infra debt lending. About 10 years ago, we bought a small private equity firm in the infraspace to start those capabilities. We bought a company called Landmark Partners a few years ago to get us into the secondaries business. That's something we're really excited about. Our view is there's a lot of this private capital that's now stuck.

with higher rates that really is going to create liquidity issues for a lot of investors so this could really be a shining moment for the secondaries business they're really five or six scaled secondaries businesses and we said we got to have one luckily there was a little bit of a generational transition going on there and we got along with them and they got along with us and they were a great fit but that came on as a 20 billion aum manager that we can really

grow in a significant way, something we couldn't do from a standing start. The last one's probably Asia. We bought a company over there called SSG. For us, it was just too far away, too different culturally. Going to London and figuring that out is one thing. Going to Hong Kong and trying to figure that out as the Americans is a whole different thing. So we were fortunate that we were able to convince a couple of guys that had spun out of Lehman Brothers to start SSG to sell us the company a few years ago.

What's been the unlock for Aries as a whole in organic growth of any of these new businesses? We say you're buying a $20 billion secondaries business and you can grow up from there. I think we have a way of doing things, frankly, in terms of business building, growth, leadership, all of that culture where we have the capacity to sort of turbocharge some things.

Certainly a bigger brand that's more well-known for something like an SSG, I think, was the Allure. But it's also access to resources, our sales team. We have a relationship team that's out in the market in probably 15 geographies that's 100 people strong on the institutional side and coming on 100 people strong on the wealth management side.

If you asked our folks in Asia, they'll say, we don't have that. We're really good investors, but we don't have that. How do you describe that Aries way of doing things that can supercharge the business? Our way of doing things is we want to be viewed as great partners. That's the most important thing because...

All we have at our firm is people and money. So you're either selling yourself as a person, otherwise you're just selling money, which lots of other firms have. And it doesn't matter if you're in the real estate business or equity or anything else. So I think we are culturally...

a little bit different than a lot of the other firms and that we actually collaborate as an organization. So to your question on the secondary side or any of the other businesses, how do we catalyze it? It's give them people and resources. But I also think we have a pretty special culture of how we think about sharing information and best practices and all of that. So if the secondaries folks come for the first time to the U.S. direct lending annual meeting, they're like, whoa,

That's a serious thing. Like you guys have this really well honed and we're like, yeah, we've been at it for 20 years. So we kind of do. So there's a lot of that sharing of best practices. It's actually a pretty nice place to work. People want to help each other. And I think that translates across the firm. How do you manage a 24 seven global investment effort? We have a 17 person executive committee.

That's representatives of folks at the firm we meet every Monday. That includes investment people. It includes folks, US, Europe, Asia, includes at a compliance, general counsel, CFO, et cetera. We do beyond that weekly meeting, probably a quarterly partners meeting, which will have a set agenda for the day. And that's encouraging people to tell us what they think is most important.

in their business, either good or bad. And then twice a year, we'll get the heads of every business together. We'll do that in January to basically put the budget for the year together to sign off on the budget, which is a bit of a social event, but also just kind of a

day of commercial of how are we seeing the year coming together? And again, what are risks and opportunities? The most important thing that you need to do, in our opinion, is you need to let people run their businesses. And that's even true for the non-investment people, right? So we encourage our head of compliance to run compliance like a business.

And if you don't have the right people in the right seats that you trust to do that, you have a problem. So for me, you know, I sit on the board, I sit on the executive committee, and I obviously run a large group of people at the firm. For me and those four businesses, it's all about my partners who really run those four businesses with me day to day, being the right people and knowing what they need to do. And if they have a problem, they know what to do about it. And if they don't, then they get to call me and we get to talk about it. It works pretty well.

What have been the strengths and drawbacks of being a public company? So we went public for a couple of reasons, and I think they've all worked. Number one, we have a much better brand as a public company because our private equity business is not the same private equity business as KKR and Blackstone and others who are in the

headlines all the time for buying $30 billion companies. I think we were just less well-known. So for us, branding, and that really did mean marketing and having investors think more highly of us for whatever reason, and that actually helped. The other thing was we didn't want to turn into a

founder owned and controlled firm. We really wanted to be able to put stock in the hands of a very broad set of employees and to incentivize people away from just the investing business of you get a salary and a bonus and you get carry and that's why you work here. Right. We wanted to share common good that everyone was playing for, which we did for a long time, giving folks private stock as part of their compensation and

Much easier for them to value that when it has a ticker than when it doesn't. And you can actually sell it versus when you can't. So, I mean, those were really the two big things. But we're now at a stage where we're large enough that we need to be thinking about this being a very large alternative asset manager 10 years from now and thinking about who's leading that company and

Having that be a respected public entity is an easy way to do that. You know, the downside is it's a public company and it comes with all the not fun stuff of running a public company. What are some of the things you figured out along the way that work today that didn't say five or 10 years ago?

The collaboration in the culture has always been there. It's not even now versus then. It's we really don't like running sort of star systems and those people don't stick with us very long. There's not that much that's different. I mean, what's different is it's bigger. There's more organizational complexity. It's geographically more dispersed. But to be honest, a lot of the same philosophy that's been there since we started is still there. And we as senior folks at the firm spend a lot of time making sure we don't lose that.

What have you found over the years are some of those benefits that have accrued to the scale you've amassed? This is one of the few investment businesses, in our opinion, that's actually easier the bigger you get, so long as you continue to invest behind it. The purview of most of our private credit businesses are, whether it's asset-focused, corporate, U.S., sponsored, Europe...

is really all about origination. So for us, as we've grown, it's just it's really about adding people and adding capabilities. And I can build on that a little bit. But what started as a largely sponsor coverage oriented model has expanded pretty substantially. But in the sponsor business, the scale, I have more people to cover more sponsors and it's just feet on the street and capacity and all of that.

We've always believed in having flexible capital and that drives origination. If you're just a Mez fund, you only get calls on Mez deals. If you're just a Unitranche guy, you just get calls on Unitranches. By the way, sometimes being in the Unitranche is better risk reward than being in the Mez and sometimes it's the other way around. It depends on the deal and the company and the economic environment and the rate environment. We've always said,

fullest product suite that we can possibly offer. We'll deploy it the way that we want to for our investors. But for borrowers, we want to be able to show them a truly customized solution that we can work with them on. That's how you lead deals and get phone calls. Right. But it's the scale of the people. It's the scale of the capital. The fact that we've been doing this together as a team for 20 plus years and you can invest behind that. So you just continue to invest in hiring and retaining the best people.

You can add industry capabilities across on top of the origination networks that you've built. So there's nothing about it that gets harder. As you get bigger, it actually all gets easier. How do you organize that origination and sourcing effort? The simple answer is geographically. So big office in New York covers...

probably all the way out to Chicago. We've got a pretty substantial office in Chicago that'll go up to Toronto and goes as far south as Dallas. And then a big business, obviously, in L.A. that's working Los Angeles and San Francisco for the most part. We always thought that everybody could do everything. One of the things that we've changed over the years is we've created a dedicated sponsors team.

a dedicated non-sponsored team that we've filled with industry-focused people. So I built verticals on the lending businesses in oil and gas, power and renewables,

healthcare and life sciences, sports media and entertainment, software, places where you can really drive origination if your knowledge is better. If you're a sponsor coverage guy and you're a generalist and someone shows you a consumer products company or a business services company, once you have enough experience, you can figure it out. If you're trying to do more and more in healthcare,

And you want to actually invest in devices or in pharma. I mean, you need really differentiated experience. So we've obviously put that on as an overlay away from just calling and originating. What's your rule of thumb of how many companies an individual sourcer can cover? Different people have different views and it depends who they are. Person who covers Blackstone at Goldman Sachs, like he has one client, right? So it depends who they are.

I would argue that if you're covering large cap sponsors that do high volume, you know, the Advents or the Premieros, you know, Helman Friedman, a couple of those will keep you pretty busy. And those obviously sit with probably our most experienced people. And then if you go down the value chain, but if you go down to the younger group a little bit, they probably need 20 or 30 sponsors to cover because just the volume isn't there.

to be as productive as you'd like them to be. How about on the industry side?

When it's direct to companies. That is driven so much by bankers and by conferences and all of that, that it's as much about covering the intermediaries. If you know enough bankers and you go to enough conferences and you're working on pharma and you're knowledgeable, CEO of that company, when he meets you at a conference or is introduced through a banker, sees you as a very valuable potential counterparty because you actually understand their business, right? A lot of other people just don't have that phone call.

Once you've identified opportunities, whether it's through bankers, through knowing the sponsors, what does your underwriting process look like? Sure. So it's been the same since we started. If you're a deal person, you get a bunch of stuff in from your origination sources, your choice as to what you think has merit and what doesn't. Right. So most of the origination is getting driven by you.

at the very least, a principal, but really principal MD and partner level people, right? And I say originators because everyone understands that word that knows our business. But just to be totally clear, we don't have an origination only team. All of our people do everything. So everyone's an investor. So if you're senior, you're responsible for sourcing, but you work on that deal all the way through. You carry it through portfolio management all the way to exit. Some other organizations don't work that way. We're big believers you need to work that way.

Deal comes in, you choose whether you like it or not. And if you do, you'll write an eight to 10 page memo that we call an early read. Comes in front of everybody on Mondays and Thursdays. Normal course, we probably see 10 of those a week between Monday and Thursday. Deal count in the US probably is 3,000. So out of the 3,000, I'd say about 10 a week, i.e. 500 actually get written up. The other 25 are kind of chucked.

for whatever reason. We run a little bit of a unique process that we've been running since the Indo days. I think it's driven by the fact that we have a lot of old Drexel people around and we've all worked for a lot of Drexel people. We don't have a behind the door investment committee. Everybody in our organization literally sits in on our investment committees.

That sounds like a lot of people. It's a lot of people. And we actually get on the associates and the VPs who are learning that those are going to be the two most important calls that they're going to be on all week, because this is how they're going to learn how to underwrite and how to do good things and not bad things. But it's quite a scene. We've got our boardroom in New York. We got the boardroom in LA. We got everybody up on TVs. And because we've all worked together a long time, it can be a little bit of mayhem. We try to keep it organized, but it can be a little bit of mayhem. So,

So when a new deal comes in, that's an early vetting of,

Do we like the company? Do we like the situation? What do we think of an early capital structure? Because again, we're trying to lead deals and price them, right? So that's where deal teams are getting feedback on. That looks like a little bit too much leverage. The pricing looks thin. Here are my nine really serious concerns on the due diligence front, most of which you probably already saw yourself and have identified. But it's a way for us to say, I've done five deals like that in my life. And these were things that weren't in your memo that you might want to think about.

Even though each person's going out looking at what they like, at the end of that process, is there an Aries deal? Something that there's certain characteristics. I think so. I mean, I think we're good at identifying what we like and what we don't like. The direct lending business today is blessed by not being a benchmark investor. We're an absolute return investor. What that means, if you think through that in a very simple way is...

You should probably orient yourself towards companies and industries that tend to default less. And you should orient yourself away from companies that tend to create more defaults. We have a good friend who used to be the chief risk officer of Wells Fargo. And during the GFC, he came in and he was like, I need to sit down with you guys. Your portfolio is performing much, much better than everyone else's. And I don't understand why. And this is kind of where we started with him. And he said, it's easy. We have

more companies with inelastic demand curves, whether it's health care, business services, software, and we have fewer cyclicals, oil and gas home building. So if you decompose the LCD index,

It's really obvious where the defaults are. They're in six to 10 industries and most of the other industries tend to outperform. So we definitely have an industry lean that is consistent towards defensive, towards growth, towards higher free cash flow and away from cyclicals because you just don't get paid to be there in a lending business. How do you balance...

the market knowledge that those are better businesses with pricing. So you probably don't have as good pricing if you're lending to those companies. So another thing that we've learned, you can't price bad credit. You can try, but you probably won't be right. The thing that's tricky about credit is it has a totally asymmetric risk profile. You get paid fees and you get paid a coupon and hopefully you get paid back. If you're wrong, you lose all your money. So it's all about being defensive and

We'll have the conversation around that early read, for instance. And somebody be like, yeah, I understand it's a little bit hairy. It has some aspects that maybe are less traditional, whatever way they want to describe it. They're like, I priced it up. So instead of it being, you know, so for plus 600, it's so for plus 900.

And most of the time we're like, I don't think that's enough. That's something that we've learned over the years is if something has credit risks that present downside that is substantial, getting an extra 300 basis points for three years before you have a huge problem is not going to solve it. What are the aspects of cap structure or structure securities that you favor over others? We're pretty flexible. So, I mean, if you look at our private credit portfolios, it's probably...

60% sort of senior and stretch senior. We were one of the early people to kind of develop the Unitronch, which was just the blending of senior and junior risk into a single security. We did it at the beginning because we audited ourselves. And one of the toughest places to play, in our opinion, is in small company mezzanine.

You're not secure. You can get put to the side very quickly in a difficult situation. And we said, I think we can mitigate some of that downside risk if we just collapse the senior and the mezzanine to a single tranche. We just maximize downside protection. We don't sacrifice much in terms of the return, but we think we decrease the losses. So we love the unit tranche business. We'll do that from $100 million unit tranche to $3 and $4 billion unit tranches that get clubbed up.

And we'll do those too. But we do believe that you have to have junior capital and equity in the portfolio because the lending business does generate losses.

You have to have something, again, that's not asymmetric in risk that actually offers upside participation to offset what inevitably are going to be some losses in a lending business. And we've been fortunate by employing that approach a long time. We've actually been able to generate more gains in that business than losses. So, of course, we have a QA.

cumulative default charge off ratio, which is very, very low, like under five and 10 basis points for both senior and junior assets. But when you take those de minimis losses and you put equity gains and upside on top of it, we've actually generated a business that's building NAV if you want to think about it that way. What are the types of situations where you'll get involved in the equity?

So the simplest one is private equity transaction where we co-invest with private equity. Right. So it's $300 million mess deal on a $30 million co-invest alongside sponsor XYZ. That's the most commonplace. But in a lot of our non-sponsored deals, what we find is we're the only real institutional capital because your counterparties are family businesses, businesses.

entrepreneurs, folks who have scraped it together and generated a lot of sweat equity. And then they're either trying to build a plant, they're trying to buy a competitor. And while they have money on paper, they probably don't actually have any real money. They don't want to sell their company because they believe there's upside. So they look to somebody like us that says we can provide some sort of flexible debt plus some sort of equity participation to help you accomplish what you're trying to accomplish. Those are probably the top two.

As you've grown over the years and scaled the size of your team and presumably also the size of deals, how have you thought about what's optimal in terms of the size of loans that you want to make? We have this perception that I don't like very much, which is folks think that we don't want to work on small deals anymore, which is not the case.

That being said, we have found that there's real benefit to being with larger issuers because they tend to have better credit profiles. They're just larger businesses. They have more diverse revenue streams.

They aren't concentrated to single products or a couple of products. They're not in just a smallish geography. They're either national or multinational companies. They tend to have better management teams. So what you've seen from us over the years is we've taken our weighted average EBITDA numbers up substantially in doing larger transactions. Some of that's just math.

If you do four times a bigger number, the math skews that the weighted average goes up. So we publish a median as well, which is smaller, but kind of the middle of the strike zone these days, probably 100 to 200 million of EBITDA, but we'll play on both sides of that. And what's interesting is

And this has changed, too, with some of the competition in direct lending. We actually don't see any delta in pricing or terms for the most part between a 50 million EBITDA company and a 250 million dollar EBITDA company. Leverage levels are about the same. Pricing is about the same. And the reason for that is there are a lot of small competitors that can do a 200 million dollar deal together with one or two other people.

There are not that many people that can actually show leadership in a $4 or $5 billion financing where you say you're going to hold a billion and a half. So the competition at the top end actually really kind of accrues to us. It benefits us and a couple other players who look like we do. How do you put these individual loans together in a portfolio?

Direct lending basically is a $20 billion BDC. We've got private funds that are both separate accounts and drawdown style commingled funds. One set of those is focused on senior debt. One of them is focused on junior. The team originates for the benefit of all the investors. So if we underwrite a $600 million Unitronch loan, we have a pretty strict allocation policy, right? It just looks at every vehicle it could go into.

Says, does this fit the investment criteria? And if it does, it gets an allocation based on available capital. And we don't really have to do this anymore. We'll cap things. We really don't like running portfolios probably more than two and a half percent positions just from an overall risk management perspective.

but we're big enough now that most of the allocations to funds are less than 1%. It's one of the things our investors, I think, like the most about us and that we can deploy, but we can also deploy in a very diversified way that others can't because of the amount of deal flow that we have. If you look across your business, how many different, let's just say corporate issuers do you have exposure to? But I think if you took real estate credit, it's something like 3,000, 3,500 names total.

That's our special sauce. We have access to private equity CEOs. We have access to the mortgage-backed securities market. We have access to what's going on in the ground in India, right? So building a culture that figures out how to make that stuff all talk to each other in a really effective way. I personally spend a lot of my time doing that.

flying around, spending time with certainly my teams and credit, but also the rest of the firm so that I can use that advantage that we have to really drive better results. Kind of curious what your competitive landscape is like today. I think there's six or seven people that we see most of the time on new deals. It's Blue Owl, it's Golub Capital, it's KKR, Blackstone, Sixth Street, HPS,

Apollo. That's the competitive set. Different people skew their businesses one way more than others, right? Golub's a very active Unitronch player. They're not very active in junior capital. HPS has a vibrant large cap junior capital business. The flavors are a little different, but obviously it's all ice cream. We're all doing the same thing.

Curious how the competition kind of coopetition works. Like you mentioned earlier, not surprisingly, you have sponsor coverage. Someone's covering Blackstone. They're also a competitor in the credit business. How does that sort of play out when you're in the markets? So part of that's competition. The biggest concern that private equity firms have is, is my partner going to be a friendly competitor?

performing credit type person, or are they going to flip the coin and turn into a distressed person, right? So we need to draw very clear lines between our performing lending businesses and our opportunistic businesses. And look, there are five or six large firms like Aries, whether it's Blackstone or KKR, that have credit businesses and have private equity businesses. And it just kind of is what it is these days.

So the key to it is organize yourselves well, make it very clear, you know, when you're coming into a situation, what the expectation is and how you'll likely behave, you know, in different circumstances and stick to it. And if you don't, you'll lose your relationships and other people win that business and you won't. I'd love to turn to some of your thoughts on the current markets and maybe kick that off with just...

rising rates, inflation risk, as you said, not terribly dissimilar from 20 years ago. How are you thinking about investing in these markets? I'll try to not play economist, but play more of credit person. This is an interesting period of time, I think, and it's true of credit, but it's true if you're a private equity person or a real estate person or, you know, infra person. It's kind of true across any of the geographies.

Our view now is the economy is actually doing pretty well. So the portfolio company performance that we see is good. That being said, we had low rates for too long that encouraged a lot of bad behavior. And sometimes that means companies have too much debt, even if they're doing well. Sometimes if you're the owner of that company or asset, it means that you paid too much.

So to try to keep it very simple, well, it does two things. It slows transaction activity, right? So deal flow is very light in all of our businesses. But you have this huge installed base of capital, as I was saying, around the secondaries piece of folks who are like, I'm not quite sure where to go with this. And because our lending businesses are so large...

We feel reasonably good about how we're positioned, even if companies have too much debt, because we feel that we've got a lot of room for error.

So just to put some numbers around it, private equity firm paid 15 times EBITDA for a company when base rates were zero. We lent them five and a half times. All of a sudden, base rates are much higher. They have less cash flow. They can't deleverage. I'm still in at a 30, 35% attachment point. I don't think that equity owner is going to want to walk away from company building, infrastructure asset, whatever it is. But the conversations that most lenders and equity are having today are

Even though companies are doing well and it's not your fault, owner, it is kind of your problem. You're the one that needs to lead the resolution. If you don't want to lead a resolution,

You can give us those assets and we'll take them at half of what you paid. That's not our goal. But I think the remainder of this year and even into next year is going to be a lot of that. It's going to be a lot of just muddling through over levered assets and owners who aren't quite sure what to do about that. So that sounds like that proverbial good business, bad balance sheet. Yeah, it is for sure in a lot of places. Are we at the point where you're starting to see action? Yeah.

Depends on the asset class. So in real estate, yes. In corporates, not so much. And then some of what's gone on with the banks has been

an interesting start, right? Like we bought a large portfolio from a bank who had had some headlines that probably they didn't like so much. But what's going on with the banks is they're selling really high quality assets as close to par as they possibly can, right? Because that's how they create liquidity and don't do themselves a disservice from a capital standpoint. We think that bank trade is going to continue for a while, right? That's great. Great for us.

In that, say one example, what does that portfolio acquisition look like from your perspective?

Basically, we brought a couple of our funds in to buy a couple billion dollar portfolio of what I view as pretty high quality assets from a bank that probably weren't thrilled to sell them, sold them at a good price. Price works for us too in terms of how we structure the transaction. But I think it's going to be interesting to see if there's a lot of follow-on activity there or not. It looked like we might have a banking crisis again. And then all of a sudden it kind of went away.

I'm hopeful that doesn't come back and folks feel good about deposits and all of that. But the reality is we have too many banks in the US, right? And we shouldn't have 4,600 banks. So I wouldn't be surprised if there's a little more noise from some of these smaller banks.

With your business being so much larger than the last time we went through a significant financial correction, how do you think about how you'll manage through that muddle through period just with the assets in your existing portfolios? We're always going to be needing more people. The busiest people in our direct lending businesses right now are not our new deal people. There are portfolio management and restructuring folks because there's just a lot of early signs that even if a company is doing well, companies are not

de-leveraging the way that they would hope to. They're getting closer to maturities. And this is true in the large cap market too. Good news is a lot of the 24 maturities have already gotten cleaned up. But if you're a sponsor and you have a maturity in 25, you're starting to talk about it and think about what the resolution is. So even if we're not in distressed or stressed situations, there's a lot of activity in the ongoing portfolio. And that's simply because rates are higher and companies have less cashflow.

Let's just say on the corporate side, what does new underwriting look like today compared to two years ago? The new business is very easy from a corporate direct line. I mean, it's

Five to five and a half times debt to EBITDA. Quality of EBITDA is actually good instead of not so good, which it was for years. Much better documents, very lender friendly in that regard. And it's probably a SOFR plus 600 or 650 over with fees if you're leading the deal. So I mean, it's an 11 or 12 percent return with fees.

So it's easy for us. It's pretty exciting vintage. You see a fair amount of people out there saying, oh, it's the golden age of private credit. It's the greatest time. It is. It's great. It's easy. But I put an asterisk on that because as I say a lot to a lot of people, you can't finance the US economy with senior debt at 12%. You'll create a depression. So it's a nice point in time. Do I think it's going to last for the next four years? No, I don't. Where are there other opportunities across what you're doing that you're excited about?

Infra is a place that we're really focused on, particularly on the lending side. The other business that we're really excited about that we're growing very quickly, but we've been at it seven or eight years is our one non-corporate credit business that we call Alternative Credit. We have Liquid Credit, which buys bank loans and high yield. We have the two direct lending businesses, one in the US and one in Europe, but Alt Credit really is everything that's not a company.

but generates cash flows. So pick your ground lease, net lease, single family rental, cell towers, medical receivables, consumer finance assets. All this stuff used to be bank assets on trading desks, and they're not anymore. So probably seven or eight years ago, we started hiring folks from banks who used to do this on principal desks to build a broad effort

in the non-corporate lending business. And what's nice is we do the same thing we do on the corporate side. So if you have a pool of consumer loans, we can be the lender, we can be the mezzanine, or we can buy the assets free and clear and get somebody else to leverage them more. So we can create returns in that space. For investors, we've done a lot of missionary work with our investors to explain it

the same way that we did direct lending years ago. It started with our CLO investing business and third-party CLOs. And they're like, oh, structured credit. I don't want any. Isn't that what blew up the world 10 years ago? Once you take them down the path of the underwriting and the strategy and the fact that a lot of it is private and directly originated, it feels a lot like corporate direct lending. It's just not to companies. And I think we have the biggest team in the space and we can really...

accelerate growth behind that. It's a very large market. We think it's a three, $4 trillion addressable market. How do you think about opportunities internationally compared to in the US? I'm more comfortable personally, obviously living in and around New York with the US than I am with anything else. We think the European market is a great market actually for what we do because it's just less institutionalized. We were one of the early folks to

We've got a real leadership position there that we can grow into. It's a little bit different in a couple of ways. The banks won't quite exit the market completely because, you know, there are still some French banks and they're nationalistic about lending in France and there are German banks that want to lend in Germany and Swedish banks that want to lend in Sweden. So it's a little less easy to totally disintermediate banks in Europe.

You can have your own view on the economies there. Europe isn't one thing. The U.S. isn't necessarily one thing either, even though we call ourselves one thing. There's a big difference between doing deals in the U.K. versus doing deals in Italy, of which we do very few. So that business for us, focusing on healthy companies and healthy geographies feels like

A lot like the U.S., right? You're talking about sophisticated, large economies with real legal structures in place that allow for lending. You have to be excited about Asia because of the growth prospect there. That being said, it's very noisy over there right now, right, for a lot of reasons. And COVID was part of that.

But I think there's a lot of figuring out to do. We have a very nice business there that's actually distributed pretty broadly across China, Southeast Asia, India, et cetera. The one place that we're not that we'd like to be investing is Japan. So that's one of the things that we're going to be trying to figure out here over the next five years. I'm personally less comfortable with that market just because I've spent less time there, which is one of the reasons to do the acquisition and bring in people who have been there a long time who are experts there.

Where are you excited about deploying capital in the opportunistic pool? Two really interesting things we can do in all of our businesses this year are just brand new deals with low leverage and high pricing. That's the easy part. The other thing that I think is going to happen all year in all of these assets, opportunistic, real estate, credit, and even PE to a certain degree, because lenders are going to be feeling less comfortable with higher rates and because owners are not going to want to sell,

Companies are going to need cash. So the most likely and I think exciting part of this year will be kind of that we're just calling it that wedge piece, probably in every market, 15 percent type rate of return or better.

You can structure it in a lot of different ways. It can be second lien, it can be mezzanine, it can be preferred, but you're targeting longer term money that can compound at 15% that's coming in at pretty good attachment points, pays down senior lenders a little bit and makes them feel better, creates capital for companies that probably need capital and extends the duration of equity owners who don't want to monetize right now because it's a bad environment to do that.

You and your five or six peers have effectively replaced the banking system from 15 years ago. Not for corporate America, but for smaller deals. How do you think about any presence of an existential risk that comes from these sort of different types of investors being the ones that are providing credit?

We try to be pretty diversified in terms of how and where we raise money, right? So we have good diversification from sovereigns, pensions, insurance, increasingly vibrant wealth management business that kind of supplies capital. And then we've got a couple of these listed permanent capital vehicles as well. So it's pretty diverse. Most of it is long-term and locked up. One of the things that we actually know how to do well because we lend money is we know how to borrow money.

So a lot of the problems, particularly during the GFC, were folks that were playing in illiquid assets with the wrong leverage facilities that got forced to sell assets at bad prices. That's always been the big risk, right, is that you have to be a forced seller at a bad time. We set ourselves up so that it's really hard for that to happen. You know, so big existential risks of kind of how we get

wound down or something. It's just, we think about it a lot, but I don't see anything particular there that I'm concerned about. Are there anything that you see outside of Aries in your larger peers or the broader ecosystem that could have contagion on you guys? You know what? There's always a little bit of wake up call. I mean, I think one of the other large alternatives firms had a bunch of newspaper articles that they probably didn't like much around one of their non-traded REITs. We have a couple of those too. So that

That freaked us out. Luckily, we've had really not a lot of redemptions in ours, but things like that carry over, right? And these are all great firms. If something happens to Blackstone or Apollo or KKR, we're going to get the same question. What does your exposure look like? How do you guys think about this? So it's, yeah, there's an interrelatedness of eight or 10 of these companies for sure. How do you think about liquidity risk in the credit markets? I think that liquidity will be

important in this credit contraction to dictate good outcomes. So we are reserving liquidity in a way that we probably wouldn't

didn't feel that we needed to in the past. There's always this talk about covenants and what happens with covenants going away. The covenants are nice to have. They allow you to reprice risk along the way. We still have them in most of our middle market deals, but the big quality companies, syndicated loan market, et cetera, the high yield, they don't have covenants. So the restructurings are all driven by capital.

and who has capital and who doesn't. And I think this will be that type of a cycle on steroids a little bit. And the reason for that is the higher rates. People are surprised by how quickly and how significantly rates increased and were unprepared for it. And the only thing that's going to solve the lack of cash flow servicing a lot of debt is new liquidity. And if you have liquidity and you can drive terms on outcomes,

I think you're going to be pretty impactful. And if you don't have liquidity, I don't think you're going to be very impactful at all. How about on the other side in your public market funding investments, the absence of liquidity in the high yield markets and the loan markets and any risks there? You know what's happened over the years? And it's one of the things that's driven the growth in private credit too. This really happened during the GFC. Most of our PMs on the liquid side

want to be in larger deals where they know there's liquidity because they have to trade those portfolios. And I mean, the GFC was extraordinary, but we'd be like, oh, great, opportunistic. Let's go buy $10 million of bank debt in this issue where the price off the sheet from somebody is 75. And we go try to buy, not sell, buy $10 million of bank debt at 75 and we get like 3 million. I mean, there's just nothing trading. So that's a world of artificial liquidity. What we focus on is trying to be really diversified.

and be in situations where we know that these smallish position size can actually trade. Because particularly in CLOs, which is the largest part of our liquid business, you need to be able to trade your portfolio. It's really important. You can't get stuck in a name. As you look out over the next five or 10 years, what do you think Aries becomes from here? Well, my partner, Mike, who's a CEO, has charted everybody on getting to 500 billion of AUM as a growth target, which I think is great and achievable.

We've filled a lot of the gaps that I think that we had in the last five years. We don't have that many more flags to plant, right? I think we're geographically where we want to be with the possible exception of being on the ground in Tokyo. I think we're happy with the businesses that we're in. When we talk to our LPs and our investors, there are not a lot of things that they look at in alternatives that we don't do. There's nothing out there for us that's a gosh,

we really need this, you know, in terms of acquisitions in the future. We had 1,300 employees pre-COVID and we came out of COVID with 2,800 employees. So this year for us is a little bit of a

People actually really need to integrate and know each other better than they maybe do when they were sitting in front of their Zoom screens during the pandemic. And especially with Asia, we were thrilled with SSG. But part of the plan was you guys are going to come to New York and London a lot and we're going to go to Asia a lot. And that didn't happen for two years. So that's that's what we're doing right now. All right, Kip, I want to ask you a couple of closing questions. Sure. What is your favorite hobby or activity outside of work and family?

It's an easy one for me, even though we play some tennis together. Still, I'd rather be skiing than anything else. What's your favorite place to ski? I was fortunate that my dad bought a house in Vail in 1995. So I've skied there a lot. I grew up skiing in Killington, but we ended up out west and we had that place. He just sold it, unfortunately. But we've skied there a lot. And actually, a couple of my partners were there, too. So that's probably my favorite spot. What's your biggest pet peeve?

I'm a very organized, thoughtful person. My wife would probably even say to a fault. I probably think too much. I don't like people who are quick to rush decisions. I actually like hearing people around me. It's something that I think I've learned to be a lot better at over the years. I feel reasonably convicted when I get to an answer, even if it's quickly. And most of the time I've been fortunate that I can get to the right answer pretty quickly. But I think I've learned the value of actually being

hearing more voices in the room and spending a little bit more time with those voices. How about on the investment side, your biggest investment pet peeve? You know, just because we all started as sponsor finance guys, I think there's too much comfort gained by the, oh, we're only in at 40% LTV. And you're learning that right now in every asset class. Things even in private markets can revalue very quickly. So you have to have a lot of conviction around where you are

in a capital structure whenever you choose to write a check to be there, because you may not feel like you're the last line of defense, but you can become the last line of defense really quickly. So I think it's just, that to me just feels careless. What investment mistake have you made that you'd never make again? There are definitely a couple of industries. I invested in a scrapbooking company years ago. I wouldn't do that again. All right. Which two people have had the biggest impact on your professional life?

My dad's definitely been very impactful in terms of my professional life. I sort of grew up with an investment banker for a dad. So a lot of this stuff started coming in through osmosis when I was a kid and just thinking about, frankly, the upside and the downside of this job, right? There's a lot of travel. It's hard work. You got to put in a lot of dues before you get somewhere. Understanding that at a young age through a lot of conversations that I had with him and frankly, observations that I had with him being my father was very impactful.

I've had some great people who I've worked for, but the reality is the three guys who I really am with in New York that are my 20 plus year partners, Mike and Mike and Mitch, are really by far most impactful people in my career. And we've built a lot of great businesses, you know, at Aries together. They're close friends, incredibly loyal. And we, I think, still are seen as a little bit of a unit. As I mentioned earlier, we're sort of out there.

building this thing 20 years ago when we were 30. So we all sort of mentored each other. It was more like being brothers than it was like being mentors. What teaching from your parents has most stayed with you?

I had a summer job doing something every single summer from age 12 going forward. So for me, it was there's nothing that will be able to hold off hard work and determination. I mean, it was really get a job every summer. I sold shoes. I worked in a clothing store. I caddied, you know, I mean, I worked in restaurants, you know, did every crummy job you could possibly actually kind of like half of them anyway. But just that ethos of like, know what you want, work hard for it and stick to it.

That was something that was pretty often heard in my family with my brother and I. All right, Kip, last one. What life lesson have you learned that you wish you knew a lot earlier in life? I started my career in particular probably as a less patient person than perhaps I've grown into in time. Maybe that's age. But yeah, it's back to this. Don't be careless. Don't be impatient.

listen to other people. I think it all goes together. Just my philosophy in terms of how I think about how I manage myself, but also how I manage people has changed a lot. Kip, thanks so much for sharing this incredible growth story of Aries and a great perspective on the markets. Thank you, Ted. Great being here with you.

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