Ares’ big play in private equity

0:28Hey, guys. It's Mark checking in from my time off. Good morning from the Financial Times. Today is Tuesday, July 28th, and this is your FT News Briefing. A French energy company is benefiting from a U-turn on Russia sanctions, and Aries Management wants to compete with private equity giants. Plus, big institutional investors are scooping up homes in the UK. I'm Sonia Hudson, in for Mark Filipino, know, and here's the news you need to start your day.

1:12The French company Total Energies is going to be able to keep selling gas to Asia that comes from its Russian plant. That's because the EU last week agreed to allow European companies to keep shipping Russian liquefied natural gas to countries outside the bloc. Greece had demanded the carve-out in exchange for an unrelated group of sanctions against Moscow. Greece has a large shipping industry. And now, three people familiar with the matter said they expect Total Energies to benefit from the decision too. An EU official said the move was justified because vessels transferring the gas would otherwise have been taken by Chinese operators.

1:54And that would mean the ban wouldn't impact the flow of Russian oil. Total Energies declined to comment.

2:07The private capital group Aries Management has held talks to acquire the private equity firm Leonard Green and Partners. The deal would more than quadruple the size of Aries P.E. business. That's according to people familiar with the discussions. It's part of a wave of consolidation that's happening at an interesting time. Private equity is really struggling. Here to tell us more is the FT's Antoine Gara. He's our U.S. private equity and deals editor. Hi, Antoine. Hi, how are you? Doing well. So how significant of an acquisition would this be for Aries? Well, Aries is one of the premier private credit firms.

2:47It's arguably the dominant private credit lender out there. And it's also one of the large private capital firms that's listed. But when you think about their business, it's just a lot smaller than rivals KKR, Blackstone, and Apollo when it comes to private equity. So this would really solve a weakness for them when you compare them to the absolute titans of the industry. Would Aries acquiring Leonard Green get them close to competing with those titans? It would. Leonard Green is one of the premier independent private equity firms. It's been around for many decades. It's widely considered to be one of the most profitable private equity firms in the world.

3:33And they've had some really recent epic windfalls, like the sale of a business they owned to Home Depot for$18 billion. So this is a really high-quality private equity firm. Well, let's talk a little bit about what's going on in the private equity space as Aries is thinking about this deal. Sure. What's happening is the industry is stuck with a logjam of about$4 trillion in unsold assets. And the investors in private equity are getting really frustrated because funds that they invested in, let's say, six to eight years ago, They've gotten almost no money back. And normally cash is supposed to come back to them fairly quickly, five to seven years.

4:16So they're refusing to make new investments until they get that money back. So fundraising across the industry has slowed. It's down 40 % this year, according to some data providers. That being said, the money is going to the biggest, most established, best known brands in the world. and that's the firms like Blackstone, Apollo, KKR, so on and so forth. And so you wanna be in that pantheon and that's really one of the real reasons that firms are considering all of this consolidation. Got it. So because the industry is in a tough spot, you basically have to be the biggest and the best in order to compete for less money that's flowing in.

5:00How does this potential deal fit into the larger wave of consolidation that's been happening across PE? Well, every public firm is looking at areas where they don't have strengths, and they're either trying to build those through internal investment, hiring of new people and so on, or they're doing it in M &A. And so scores of other rivals for areas, you know, EQT, CVC, Brookfield, all of these firms have also made acquisitions to round out those businesses. and it's putting the power in the hands of, you know, 10 to 20 large public firms. And then there's another 40 or 50 private firms that have substantial scale.

5:47But really, the industry is coalescing around, let's say, the top 100 or so private capital firms. And I think the current zeitgeist is bigger is better. Well, I guess the question is, is this deal actually going to happen, though? I mean, what have Aries and Leonard Green said to you about what you've heard? Private capital firms have been sort of speed dating and discussing mergers for years. And so a lot of firms have had on and off talks. And what we reported was that these were pretty serious merger discussions. But we also have no certainty that there's going to be a deal here. And both firms declined to comment when we reached out to them.

6:28Antoine Guerra is the FT's U.S. private equity and deals editor. Thanks, Antoine. Thank you for having me.

6:39It looks like holding debt in AI-related companies is getting riskier. Think big tech groups like Oracle, SpaceX, and Meta. A key gauge of that risk, prices for credit default swaps, is rising rapidly. They're a popular tool to bet against corporate debt. It's another indication investors are getting more nervous about how much companies are spending on data centers, chips, and computer memory. On top of the credit default swap prices spiking, there's been a big sell-off in debt issued by so-called hyperscalers. Those are companies that have piled hundreds of billions of dollars into developing huge data centers and AI models.

7:26Investors are increasingly worried about how much debt those companies are selling.

7:37Institutional investors are snapping up UK houses en masse. That's because the property market is struggling. Individual buyers are on the sidelines as high prices and sticky mortgage rates stand in their way. Here to discuss this latest trend is the FT's property correspondent, Julie Steinberg. Hi, Julie. Hi, thanks for having me. Thanks for being on the show. So tell me a little bit about just how much property these investors are buying. Sure. According to one measure, 12 % of London properties that were originally intended to be sold privately to homebuyers were sold in these bulk deals in the year to June 30th.

8:16And that's up from 7 % in the 12 months before. These institutional investors are getting pretty good discounts on the homes, anywhere from 15 to 20 percent, sometimes more than that, up from single-digit discounts just a few years ago. And that's because of the precarious nature of the home-buying market right now in the U.K. Yeah. Why is the U.K. housing market so precarious right now? It's been a pretty gloomy atmosphere for house builders in the past several months. You have this uncertain economic backdrop that was sparked by the Iran war, as well as higher mortgage rates that have eroded buyer confidence.

8:54Housebuilders also say that building costs have gone up and complying with regulations has also proved expensive in the past few years. And that puts pressure on their project's viability. So they're finding it difficult to offload these properties because people simply don't want to buy them right now. And that gets us to these bulk deals that institutional investors are striking. How exactly do those work? A couple different ways. You can either have bulk sales that involve an investor forward funding a deal for future construction, or we're seeing institutional investors pick up properties that have already been built and weren't able to be sold by the home builders.

9:33The deals can involve dozens or even hundreds of homes. And market participants say these deals are mutually beneficial because the transactions give house builders a cash injection from offloading stock they wouldn't have been able to sell or haven't been able to sell privately. And the institutional buyers get cheaper access to homes that they're then going to rent out as part of their investment strategy. Okay, so it makes sense that these are mutually beneficial for both the institutional investors and the house builders. But what about individual buyers? Where does this leave them? As long as rates stay higher for longer, I think we'll continue to see hesitation on behalf of individual homebuyers, which leaves more room for institutional investors to come in.

10:16That being said, these institutional investors currently dominate around 2.7 percent of the market of the private rented sector. It's quite small. So overwhelmingly, you still have homebuyers who are renting from smaller landlords. But at this point, institutional investors are piling in. You know, there's criticism over the extent to which they should be in the market. Some people say that it keeps potential buyers renting for longer and then they're subject to the whims of rising rental prices. Other people say that without the institutional investors, you wouldn't have these homes being built at all.

10:53So it's a mixture of factors that we'll have to see play out. And especially now with a new incoming prime minister and how housing policy evolves under him, it'll be fascinating to see all these dynamics at play. Julie Steinberg is the FT's property correspondent. Thanks, Julie. Thanks so much.

11:14Before we go, the luxury giant LVMH is back in style. Sales at its key fashion and handbags division are growing after two years of declines. The luxury market in general has been struggling because of geopolitical turbulence and big price rises from the leading fashion houses. The turnaround for LVMH is thanks to strong sales in the U.S. and more demand for Dior. Its new creative director launched some new collections and stores, which LVMH said boosted sales.

11:52You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News briefing. Check back tomorrow for the latest business news.

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