Ares Management CEO Michael Arougheti breaks down where to find yield

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Inflation, a hawkish Fed, fears of a recession have all made 2022 a tough environment for investing.  A traditional portfolio of stocks and bonds is deeply in the red, leaving investors to seek diversity elsewhere. 

Ares Management, however, has been a beneficiary of the current environment. With hundreds of billions of dollars’ worth of floating rate credit and real assets, the firm’s $200B book has surprisingly held up well.  CNBC’s Delivering Alpha newsletter sat down with Ares CEO Michael Arougheti who says that “when the markets get challenged, that’s when our investment opportunity becomes the most attractive.”

(The below has been edited for length and clarity. See above for full video.)

Leslie Picker: How long do you think these tailwinds for your business will last?

Michael Arougheti: I think we have to talk about secular tailwinds in alternatives, and then maybe some of the cyclical tailwinds that we’re seeing as well. So if you look over the last 20 years, we’re seeing a meaningful increase in allocations on the part of institutional and retail investors to alternatives. And to oversimplify what’s a complex series of global flows, it really comes down to a global desire for durable yield. Hence the demand that we see for private credit assets globally, and maybe a dissatisfaction with the performance of traditional 60/40 portfolios and what seems to be more consistent volatility in the traded markets. And so we’re also seeing increasing demand for things like real assets and private equity. I don’t think that will end anytime soon. If you look at institutional allocations to alternatives, they are predicted to double likely over the next five to 10 years at a compound annual growth rate of about 15%. And we’re now seeing the retail investor really take hold as well.

Picker: As you think about the inflationary environment, in particular, and in planning for your own business in conversations with LPs, what’s your take for how long we will be in a current situation like we’re in right now?

Arougheti:  Well, this is like something we haven’t seen before. So you know, each cycle is different. But there are echoes of the past. And I think one of the key jobs that we have at Ares is to mine our historical experience and recognize patterns. For the last almost 10 years, it seems like almost every market has been correlated and performing well. We obviously navigated the pandemic with a significant amount of government and central bank intervention. But today, as we sit here, there’s a particularly interesting set of crosscurrents, that’s now starting to see a divergence of opportunity around the globe. So we’re not only dealing with inflation, but we’re now dealing with the impacts of a strong dollar globally, we still haven’t quite gotten through the supply chain constraints that we’re dealing with, and then overlay just for good measure of global, global conflict and energy…