Ares Management CEO & Co-Founder Mike Arougheti Talks Record Earnings

**SPEAKER_1** (0:02)
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**Jonathan Ferro** (0:07)
Ares reporting at NXP, highlighting another record quarter of fundraising with over $36 billion of inflows. The CEO, Mike Arougheti, writing, Our clients continue to reward us due to our strong and consistent fund performance across our strategies. Mike joins us now in the studio for more. Mike, good morning, good to see you.

**Mike Arougheti** (0:23)
Good morning, good morning.

**Jonathan Ferro** (0:24)
I wanted to start with a quote of yours from earlier this year, when things were pretty difficult with the software issue. And you said something really important. You said the following, if you're going to underwrite a narrative of AI disruption, you also then have to say, well, what does that mean for the productivity and margin improvement for the rest of your book? I think that's a good place to start. Where are you seeing value being created right now?

**Mike Arougheti** (0:45)
I'm glad I said that.
So if you look at the way that Ares is playing the AI transformation, it's what are we doing within the data center and digital infrastructure space?
What are we doing within our portfolio companies and what's that productivity uplift? And then what are we doing within Ares proper to either improve our investment outcomes or profitability? So if you start with Ares first, we're obviously deploying AI across the entire enterprise. We're seeing significant efficiency. We had 100 basis point margin increase in the quarter year over year, and we've guided the street to expect to 150 basis points per annum. A fair amount of that is technology efficiency that's getting created, re-underwriting processes, re-underwriting systems, and we are seeing uplift. That is also translating into increased productivity and margin expansion within the portfolios. So if you were to look across our private equity portfolios, our private credit portfolios, cash flow growth is still plus or minus 10 percent. If you look at corporate earnings, I think you're going to see that that's generally the theme. And then within the investment space, we are doing our best to stay diversified in the way that we're attacking the digital infrastructure opportunity. Big investors in data center development, but I think our approach has tended to be a little bit more targeted. We're doing 150 to 300 megawatt deals, hyperscaler adjacent in large tier one markets like Tokyo, London, Sao Paulo, pre-leased 12 to 15 year terms with escalators. So we have probably shied away from some of the secondary and tertiary markets and stayed away from some of the frontier model type of opportunities.
Two, we're a very large lender in the infrastructure debt space, and you're seeing that rolling through our earnings as well in terms of the fundraising and deployment momentum there. So we are one of the largest institutional lenders to other developers and that's been a bright spot. Three, we have a large asset based finance business, and we're squaring off with a lot of the banks on SRTs and portfolio purchases where we're helping them free up liquidity on their balance sheet to continue to deploy into the opportunity. And then four, we have a very large infrastructure equity business where we're investing all around the digital ecosystem, transmission, fiber, battery storage, et cetera. So we're kind of attacking it from all angles, but our view has been we want to be global, we want to be diversified, and we want to have the full capital structure so that we can move around where we see best relative value.

**Jonathan Ferro** (3:21)
It's the second word I want to dig into, diversified. And I'm open to the reality check. I'm just going to say it feels. It feels like a lot of people are in the same trade. They're in asset banked infrastructure debt on the credit side, and they're taking direct equity investments to say software and models.
How do you avoid all the crowding that we're starting to see in other places?

**Mike Arougheti** (3:41)
In digital specifically?

**Jonathan Ferro** (3:42)
Within your firm?

**Mike Arougheti** (3:43)
Yeah, I think the key in this goes, if you look at our earnings this quarter, and you put the numbers up on the screen, what screams out to me is just the broad based nature of the business and the diversification. And so the way that we think about private markets, is we want to be up and down the capital structure, debt to equity, so that we can move around and find relative value in response to rates or the economic environment. We want to be horizontally diversified across all the different private market asset classes, secondaries, private equity, real estate, infra. And you'll see investor appetite and our own view of relative value shift. And then within the funds, we want to be highly, highly diversified. So if you look at our credit funds as an example, you may see 900 to 1,000 line items. So we're not going to have any single exposure really drive the long-term performance. And I think that's key. There is a risk in any investment business that you're over diversified.