Building the New Economy w/ Ares' Kipp deVeer

0:04Kipp deVeer: Previously on Dry Powder. Credit is a business where as you get bigger, you get better. Kipp deVeer, co-president of Aries, unpacked the forces reshaping private credit and why scale remains a decisive advantage in an increasingly competitive industry. Today on the show, we'll turn our focus to where Aries is putting capital to work. I'll ask Kipp about the importance of picking your spots, the industries and asset classes where the firm is exercising caution and the parts of the new economy where it has the strongest conviction. We now have a hundred plus billion dollar real estate business that lends in the U.S., lends in Europe.

0:38But their focus has been play into the areas of the new economy. So it's a lot of multifamily. It's a lot of industrial and logistics. And it's increasingly in digital and data centers.

0:49Kipp deVeer: We'll also explore ARI's evolution from financing data centers to developing them directly. I'm Hugh MacArthur, Chairman of Bain's Global Private Equity Practice, and this is Dry Powder.

1:04Kipp deVeer: Kip, one thing we've heard from you in the past is the importance of picking your areas of expertise and growing where you have conviction that you can win. Where are you most excited today when you look at the investment opportunities? On the corporate credit side, we have consistently talked about the ability to play in defensive industries and avoid places where you typically get hurt. So US direct lending, European direct lending, and also probably the asset-based piece of it is stay away from the industries that create default. On the asset-based side, we're pretty bearish on the lower end consumers.

1:45So we're staying away from portions of that market. In real estate, we've taken a pretty targeted approach too, where we've said we really want to focus on the new economy parts of real estate, which means not a lot of hospitality, not a lot of office, lots of industrial, lots of logistics that are big picture winning portions of the market. whether it's the corporate market, the ABS market, or the real estate market, there are always portions of the market that tend to cause problems during downturns. And if we're able to be underexposed to those parts of the market and lean more heavily into the parts of the market that tend to perform well, even in down economies, we'll do better than most.

2:32And it's just sort of stick to that.

2:34Kipp deVeer: Makes sense, Kip. We talked a little bit earlier about AI and we talked about it in a defensive posture. I want to talk about it now as an opportunity and get your thinking around the rapid build-out of the digital infrastructure required to support all of these new AI tools and bandwidth. What sort of deals does Aries, in your view, have a quote-unquote right to win? Yeah, so we've been a pretty active player in that market, right? So we have an asset-backed credit business that can obviously play in some of these big higher grade deals that you're hearing about with our insurance clients. We also have a significant kind of middle of the capital structure, infrastructure debt business that's a very significant investor beyond those senior secured.

3:21One of the things we're excited about too is actually finally entering as developers. So when we did this acquisition a year or so ago, a company called GCP. Pretty interestingly, the acquisition was really of a Japanese logistics provider. They built these tremendous facilities around the world on the industrial and logistics side. They said, I think data centers looks a whole lot like real estate and logistics. The one piece of it that we don't have is the technology expertise. they went out and hired a team largely from the hyperscalers saying we want to actually go out and build and develop these assets.

4:01So we're excited about that. I mean, I think that'll be one of the big new investment businesses that sort of came out of nowhere at our place in the last

4:10Kipp deVeer: few years. That really does sound fascinating. And part of it, you mentioned real estate. I always find interesting because when I think about real estate, you tend to think about, well, it's residential, it's commercial, it's office buildings, it's strip malls, it's healthcare centers, it's things like that. But you're talking about real estate in a way that really is playing into the segments of the new economy, if I can call it that. Can you give us some examples of how your real estate investment business is really moving forward into this space? Yeah, I mean, real estate business is really, it's something we've been kind of piecing together, I want to say, over the last 15 years, right?

4:44So we now have a hundred plus billion dollar a real estate business that lends in the U S lens in Europe does value added and opportunistic equity in all of those markets, but their focus has been play into the areas of the new economy. So it's a lot of multifamily. It's a lot of industrial and logistics, and it's increasingly in digital and data centers. And we've skewed away from the places that are tougher, you know, whether it's office or hospitality and it now is global. It's become a great business for us. It's really matured and sort of grown up over the last couple of years.

5:21Kipp deVeer: Right. So, Kip, we spent a lot of time talking about credit and real assets. This is called the Private Equity Podcast, so I have to bring up private equity. How are you thinking about the growth prospects for the private equity business at ARIE specifically? Yeah. Look, I mean, you know this as well or better than I do. When we go talk to our LPs, right, and you talk about we're an alternative investment firm, the largest asset class that most of our LPs have exposure to in alternatives is private equity. Right. Mark Rowan said this, so I'll repeat it because I agree with him, which is private equity is not really a growth business.

6:00You know, it's a good business, but it's not really a growth business. So having not kept pace isn't something that puts me off all that much. But, you know, the question for us is if we're going to be in a certain business, call it private equity, should we have something that's more substantial, that's more relevant for our LPs? Look, the good news is I think there are a lot of single strategy private equity managers out there who are looking at the world and saying, wow, big consolidation and alternatives. would we be better placed with a larger firm that has all the resources that a firm like Aries has?

6:41So we'll see. Sure.

6:42Kipp deVeer: And there's been a lot of M &A activity in the private equity space overall. It's been increasing over the past five to seven years. So it's definitely, it's been a challenging stretch for that market. And you quoted Mark saying it's not a growth business. But what do you think it's going to take for the private equity industry to get back to more, if I can use the word, normative level of dealmaking going forward? Yeah, I mean, look, I think over the last 20 or so years, you've seen a business and private equity that has grown tremendously. Right. That's probably grown so much that it's difficult to generate the returns that folks historically have expected.

7:23but you know the top quartile or two quartiles of funds over the last five ten years i think will continue to prosper and offer the value you know that their investors are looking for and the folks that haven't done as well will probably not make it and you know can the industry not grow slash shrink a little bit and become healthier back to 10 15 years ago probably So I think it's just a little bit of a rationalization. I play it the same way that you look at the hedge fund industry, right? That sort of blew up in a good and then not so good way. And then the returns weren't great. And folks complained about fees being too high and capital exited.

8:08And I think the same thing's going to happen in private equity.

8:11Kipp deVeer: Now, if I can ask you to look into your crystal ball a little bit here, Kit, for the audience, let's roll the clock forward five or 10 years. How do you see Aries evolving over that period of time? And as you go forward, what does the world look like and what does Aries look like? We did a handful of acquisitions over the last five or six years that I think kind of filled out our capability set. So we've added substantially on the real estate side between Black Creek and GCP. and GCP was important because it got us real entry into Asia where we were trying to grow and we needed people on the ground.

8:53We bought two businesses in Asia as well in SSG and Crescent Point Credit and Private Equity to get people there. Those are hard markets to build organically. You know, there are language barriers, there are cultural barriers. So we sort of got that in the ground in Asia. And then when we bought Landmark, we were really trying to get scale in the secondaries business. So we've done four or five things on the inorganic side that I think filled out the platform away from maybe something in private equity. I don't think we're lacking anything at this point in terms of the scale and the breadth of the platform.

9:31And I think we have organic growth opportunities in all of those places. Secondaries is experiencing seeing huge growth. We see huge growth opportunities in real assets and in Asia, you know, credit continues to kind of do its thing in all five businesses. So I think it's, you know, continuing to diversify distribution. I think wealth will grow. I think insurance will grow. The institutional side of the business, I think will continue to grow organically as it has for 20 plus years. You know, the focus for last year or two has actually really been more digesting it all. Pre-COVID, call it November 2019, I think we had 1 ,800 employees.

10:12We have

10:13Kipp deVeer: almost 5 ,000 now in 50-plus offices. So it's really like, let's optimize it. Let's make sure we know what we have, optimize it, and reposition for organic growth for all these platforms that we've added. So we're feeling very good about the prospect for the company as a whole. I mean, The company is always very healthy, great people, organic growth opportunities all over the place. We're just going to try to leverage that. Well, listeners of this show will know that I'm a glass-half-full kind of guy myself, so I like that kind of buoyant, organic view of where private markets are going in the future.

10:47Kipp deVeer: Obviously, as one of the largest players in the entire industry, Ares should be poised to capture a lot of that value that will be out in the future. Kip, I wanted to thank you again for coming on the show. It's been a terrific conversation. I'm sure the audience has learned a tremendous amount. I know I did. It's terrific to see you. No, it's great. Thanks so much for having me. Appreciate it.

11:09Kipp deVeer: I'm Huma Carther. Thank you for listening.