#92 - Kipp deVeer: Steering Ares’ Growth in Alternatives

0:05Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry, investment, investment, and market insights. We define insights as concepts that are counterintuitive, widely misunderstood, or underappreciated. In other words, unique ideas that you probably won't hear elsewhere. I'm Alex Shahidi, the host of the podcast and co-CIO of Evoke Advisors, a leading investment advisory firm. Learn more about our show at insightfulinvestor.org.

0:38Joining me on the podcast today is Kip DeVere. Kip is co-president of Aries Management, which has$572 billion in assets under management as of the end of June. And Aries is a leading global alternative investment manager that focuses on credit, real estate, private equity, infrastructure, and secondaries. Kip, thank you so much for joining us today. Thanks, O. It's nice to be here. Let's kick it off with your background. What would you say originally led you to the asset management industry? It is an interesting question with some of our lists beforehand. So I don't know if I sort of found my way there, but I, after graduating from college, like a lot of other people in this business, jumped into an investment banking analyst program at J.P.

1:24Morgan. I figured out pretty quickly that my interest in finance was much more in investing than it was in being a banker. Though I did two years in that program and quickly switched over before going to business school to work for J.P. Morgan Asset Management, which I liked a lot more. Just like the idea of actually banking felt very transactional and asset management was something where made an investment in a company and a lot of the things that we were doing, you kind of stuck with it. So there was a little more term and a little more result orientation. You kind of see the results of what you did rather than working on something for eight or 10 weeks and not having a sort of vanish on you.

2:00And is there anything specific about this field that you find either most or least attractive? I think it's pretty rewarding. I mean, it's challenging in terms of the rigor of the analysis. But I think it also is, at least in our business, it's fun because there's a real personal dynamic to it. We always say that a lot of people are working with Aries by choice. We really want to, whether it's as a vendor or a buyer of a company or a buyer of assets, we want to be a partner of choice. So it kind of is a nice combination of the need to have rigorous analytics, but also to have interpersonal skills to develop relationships with management teams and owners of assets and all that.

2:39So it's a pretty nice combination of talents. At least for me, it's been attractive and rewarding and interesting. Well, you've built your career in alternatives. Is there something about that space that you find more compelling than traditional asset classes like stocks and bonds? Yeah, actually, well, so back to where we started a little bit. When I was at J.P. Morgan Asset Management, I was actually in a group. I got a little bit lucky that was kind of a multi-strategy group within J.P. Morgan Asset Management. So we did everything from buying stocks to buying bonds. It cut a high yield for the most part.

3:12we did some emerging orchid stat that was more liquid and then we had a full illiquids business that focused on kind of lending in special situations i guess before you know everything was so well defined and i i gravitated very quickly to want to work on the illiquid sort of private stuff because i love the access to information that you got and the access to management teams i found stocks and bonds to be actually pretty challenging because you're making decisions without a lot of information. I think for some people, certainly some were very good at that. They find that actually really interesting, right?

3:50The lack of information and the lack of good diligence. I kind of prefer the private side of the business where you could really dig in and understand a company or understand a set of assets. That for me was the catalyst to get me into private markets instead of public markets. Would you share the history of the firm since its founding in 1997 and how it's evolved over the past couple of decades. Yeah, sure. I think there was always an overarching belief or an overarching belief rather that if we could surround a credit business with a handful of other things and expand our reach globally, just that insight would allow each of those businesses operating alongside one another to sort of be better for all host of different reasons I'm sure we can get into.

4:35So the firm grew, raised a couple of funds, started raising debt funds, started raising actually a kind of special situations oriented private equity fund right before we joined. And when I say we, it was myself and Mike Ergetti and Mike Smith in New York. And we opened the office in New York in probably March of 2004. The firm was small. We had about, you know, three billion of AUM at that point, about 66 people in California. and we brought 12 or 13 of us from a bank in New York. And I guess that made it 80. And our remit was to come in and do what we'd been doing in banks, which was kind of start to build out this institutional, you know, U.S.

5:18direct lending and privates business that would kind of sit in between what we had on the liquid side, mostly loans and high yield. And then what we were doing on the illiquid side, which I'd say was more oriented again towards special situations and private equity at that point. it's changed a lot in 28 years. We've obviously built up what we think is a, you know, substantial and leading credit business in five different areas. So we still have our public side business that buys loans, buys high yield, you know, as a counterparty to the street, liquid investing, both through CLOs and through other funds.

5:53And then with what we did in New York and then into London in 2008, kind of two very big corporate direct lending businesses originally focused on sponsors, but they've diversified in a substantial way to be broader. And on top of that, had built what we call alternative credit. Other people call asset-based strategies, as well as taking on more capital on the opportunistic and distressed side. So those are sort of the five credit businesses today. They sit along a large real assets business that we've built up both organically and through acquisition. So that's real estate, that's traditional infrastructure and increasingly digital infrastructure.

6:32We have the private equity business that's grown from where it was back in 2003. And we've also really focused on building out our secondaries business, which we kind of brought on board through an acquisition of a company called Landmark Partners. but that participates in each of the primary businesses that we're in. So private equity, credit, real estate, and infrastructure, and that business is growing super rapidly. So we love the diversity. It's changed, obviously, a lot in that we've taken the business to be a U.S.-focused business to really be a global business. So while the lion's share of management and folks kind of sit somewhere between Los Angeles, New York, and London today, We actually have about 50 offices and are truly global in nature, operating in the U.S.

7:20and in Europe and in Asia as well. That's great. I've heard you talk about a vision early on that just a handful of large managers would lead the alternatives market. Why do you think that was the original belief and did it actually play out as expected? It's definitely played out that way. I don't know if we were smart enough to have known that 20 years ago. we were just trying to bring on good people and build good businesses. But what we'd found is if you were able to actually achieve kind of early mover status in certain places and deliver really good returns for investors, that basically more capital would follow strong performance.

7:59And obviously Aries, along with a couple of the other large alternative firms, even though they may have started in different places, have kind of converged to be in a lot of the same businesses, and they've done it with a vision that there are real advantages to operating at scale, being able to attract and retain the best talent. Again, being a counterparty of choice with flexible capital, regardless of asset class. These are all really important things that create competitive advantage. And as you continue to build them, they're lasting. They reinforce one another across the business and across the globe.

8:35Well, Aries went public in 2014, a little over a decade ago. But what do you feel has fundamentally changed in the organization's operations or market perception? Yeah, I mean, I'll give you a little bit of our thinking around going public. So because we'd never led with that really large private equity business that perhaps some of our other friends in the alternative space had, we had a lot fewer by choice, frankly, front page Wall Street Journal headlines. You know, so-and-so buys$5 billion company. You know, others had that. We really didn't have that. So I think that we, you know, in 2012, 13, were a relatively lesser known and perhaps less appreciated alternative to some of the investors we were talking to.

9:29Our brand was less well-known. Certainly globally, I think we were pretty well-known in the US and increasingly in Europe. But as a global brand, we sort of just weren't there. and we thought joining the club of alternatives managers that had been able to list would give us an uplift in global branding that would help the firm. And for sure, that has been the case. So that was one thought. The second one was we really wanted to build this firm for the long term. Unlike smaller, less diversified firms, it's easier to attract and retain talent and it's easier to build the organization both from a cultural and compensation standpoint when you have a public stock right so we spent years um you know as a private company trying to deliver value to employees and it's hard when there's no stock price it's difficult to understand you know what that value is that you're creating going public allows you to kind of show that value to some of the people that had been there or also show value of people that you want to bring on board because it's very tangible, right?

10:39And it's very easy to see. And with that, we had, again, another tool to sort of reinforce that how do you attract and retain great talent, which is really what the business is all about and really build an organization that can last. So I think that's been a huge, huge advantage. And look, I mean, the third thing that we've done well, I think better than others, and we've been able to raise our game is actually make meaningful complementary acquisitions using the stock. Delivering that stock as part of acquisitions to a counterparty is much more credible, obviously, when there's a stock price than when there's a privately negotiated market value of that stock in a transaction.

11:24And after going public, we've been able to put together some pretty significant sort of inorganic growth, whether it was adding Black Creek in our real assets business, which has also catalyzed our growth in wealth, certainly Landmark Partners, which I mentioned, and the recently closed deal that we did over in largely in Asia with GCP and our real assets of digital infrastructure business. Being able to have a public stock really allows you to think about expanding the platform with a currency that's valuable to others. So I'd say those three things were really the impetus to why we did it. And all three have proven to, you know, I think we were right on all three, right?

12:04All three have been valuable sort of arrows in our quiver, so to speak. I'd like to touch on a couple of concepts that you referenced earlier. So Aries obviously has scaled very quickly and has enjoyed rapid growth. Are there any guiding principles that have helped sustain the firm's culture and values as you've scaled? Yeah, I mean, I think, look, the challenge as you get bigger and as you get more global is places like Aries, and I think others have attracted talent, typically from large organizations, a lot of the time banks, right, who have said, a person would say, I don't feel as impactful in such a large organization.

12:48I'd like to do something a little bit more entrepreneurial. how can I get myself into a slightly different seat to unlock some of that? And all the folks, myself included, I think, who kind of started the firm and helped build the firm from inception had that ethos and the cultures built around that desire for entrepreneurship and impact and all of that. So look, as you get larger, it's making sure that you build out a robust organization while not compromising that desire that most people still have in joining Aries to be entrepreneurs to a certain degree. And to think with a growth mindset, a lot of the folks that do come to us still, I think, felt smothered in their prior place or felt like it was too crowded or they didn't have the ability to kind of have the impact that they were hoping to have.

13:38And the way that we've thought about it is when we onboard either companies through an acquisition or people whether it's in a group or in an individual hire you know they really have to be kind of culturally aligned with us from the beginning then we need to protect that desire for what they have kind of aligning with our culture but look I mean some of the things that we stand for are pretty simple which is we care about having a collegial fun environment to work right I mean I legitimately think Aries is a great place to work I think people like each other they get along They spend time together outside of work very often.

14:19It's a hardworking place. There's transparency. There's accountability. But folks do have that ability to go make an impact without having to feel like they're getting smothered by the organization. At least that's my hope. So if you can build these pockets of entrepreneurship and growth within an organization while still keeping the enterprise kind of on top of it to put the appropriate controls in place, that's the right mix for us. One of the areas that you've expanded is your client base and you have more massive fluent and retail clients now than you did years ago. Is your sense that portfolios are getting more sophisticated and what do you see shaping access and demand for alternatives in the years ahead for that client base?

15:05Yeah, I mean, just to give you a little bit of history, we were early, I guess, with mass affluent in retail and that we launched a BDC in 2004 that a handful of us have run over the years. So that was an early way for that client-based to access alternatives broadly. So we had some experience with listed companies. But what we've done since then, I think, has been a little bit different to your question, right? We had dabbled in figuring out ways to build out wealth distribution, but actually it's quite expensive, right? Because you really have to hire a lot of folks in advance of launching products that have revenue.

15:45So the catalyst for us was actually an acquisition I mentioned that we did in the real estate space called Black Creek. And their historical business had been distributing non-traded REITs, largely through the wire houses. And when we acquired Black Creek, which we kind of focused on first as a real estate acquisition to bulk up our capabilities in industrial real estate investing, we were fortunate that we realized during our assessment, but certainly during the due diligence, that we were really taking on something that could build the cornerstone of our wealth platform. And that's what happened.

16:21So Aries Wealth Management Solutions kind of came out of Black Creek. A couple of the partners there that run that, Raj Donda and Casey Gallagher and Christina Adamson had done a phenomenal job sort of up-tiering and growing that franchise. So we've got, I want to say, I'll probably get the numbers slightly wrong, but call it 150-ish people now in that business. And it's global. So we've put a team in place in Europe to focus on that market. We've hired a team over in Asia to focus on the Asia wealth market. And we've grown the products that we're able to bring to investors there. So it's a handful of non-traded REITs.

17:01It's a non-traded BDC in the US. We have a core infrastructure fund. And what we've seen is just a significant demand coming from the mass affluent investor who have never had good access to these products. And as the markets have moved, and as the returns in these asset classes have continued to be good, and there's increasing press about it, I think a lot of clients that had financial advisors at whatever wire house were basically banking the table and saying, this is all I hear about. How do I get access to this? It seems like people are getting great, great returns in these type of products, and I don't seem to have any access to this.

17:40So I think we and others have been able to grow into that market and create good products for folks where there's real demand, and we don't see that slowing anytime soon. It's a really interesting trend. What do you think are the biggest differences and similarities in behavior, sophistication, and motivation between the retail clients and institutional clients? I think retail is largely following the lead of institutional demand, which was a desire for premium yield relative to what you can get in the public markets, a desire for sort of diversified equity, and then tax-advantaged real assets.

18:21Those are sort of the three themes that we play to in retail with the product suite that we have. But for investors, it's a recognition that they can have a portfolio that is less liquid, which is something the institutions figured out really during the GFC, I'd say. They looked during the GFC and said, all this liquidity that I have, I thought was valuable to me. But now when I go try to get liquidity at a price, it's really not there or it's not there in size or a price that I like. And most of our institutional clients over the last 15, 16 years since then have shifted to say I'm happy to be less liquid to earn a higher risk adjusted rate of return.

19:05And that's really what's compelled the retail and mass affluent decision making in the space. But, you know, the same way it's taken education over the years with institutions, this is something we're spending a lot of time on in that channel, in our wealth channel, in terms of educating wires, educating the RAs and FAs, and certainly the clients to have them think that this is something they should be spending more time with and eventually allocating more capital to. Is your sense that the gap is narrowing over time? For sure. Yeah, I mean, to keep it simple. If there's real demand there, the education, I think, is needed but effective.

19:46And we've obviously had a lot of uptake with the division of ours. So we're happy with outperforming. We see a lot of growth going forward. One of the segments within private assets that has seen a lot of growth is private credit and BDCs. Do you believe that growth has been driven more by borrower demand or investor demand? I think it's a combination of both. Speaking specifically to private credit for us is a lot of things. It's corporate direct lending, which is where it starts for most people. But we do private credit in a lot of different places. We have a real estate lending business. We have an infrastructure lending business.

20:26Most of our asset-based finance business is private credit, etc etc i mean i think having built out a lot of the u.s and european direct lending businesses from its core it was just a much much smaller market back then right so when we started we were financing you know 10 to 50 million dollar companies in those markets today we're financing companies that may have as much four or five hundred million dollars of ebitda right so So that's all as a result of the bank's businesses continuing to change and expanding addressable market for private credit broadly. So certainly that's speaking to borrower demand.

21:07A lot of companies, typically those owned by sponsors, have really come around to say this might be a better product for me. And increasingly, you'll see some of the headlines too. Corporates are seeing that too, even as it relates to non-investment grade, i.e. high grade exposures, right? We're now able to go direct to companies that would historically go to the high-grade markets to show them private solutions. So just the fairway for all of this has just expanded so much. The good news is the returns have remained quite strong. So you need oath, right? Investors need to support you, us, with capital to be able to deliver those solutions to borrowers.

21:47And it's sort of moved up ratably so that all of these businesses, both for us and for others, have grown. there obviously been a lot of private credit funds that have launched in the last several years is do you think there's a risk of a bubble forming and and how do you think that may show up in metrics like yields or spreads yeah i mean yes it's interesting there there is this perception uh there's been huge growth in fundraising direct lending you actually look over the last three or four years um fundraising and direct lending is actually down every year for the last four years. So I would actually say the peak of capital raising there was probably 19, 20, 21.

22:29Right, when rates were really low. Yeah, yeah. And that excess spread, that excess premium yield was really, really valuable. And obviously it was easier to attract capital. We still think, look, I don't view it as an index. I don't think that every manager is the same. And I think investors miss that a little bit. And we do think that we and others as kind of longstanding, large-scale managers in the space have real advantages, whether it's origination advantages, underwriting in terms of access to information, as I mentioned about the global platform and the strengths that it brings, but also on the risk management side.

23:07I actually think the top-tier managers should be able to continue to show really strong performance, and we feel good about our positioning, so it doesn't worry us too much. You alluded to this a little bit earlier, but what do you feel like drives investor interest in private credit? Is it simply the equity-like yield and capital structure seniority, or do you see deeper changes in attitudes towards liquidity? I think it's both, as I was mentioning, sort of the institutional to retail trend. I mean, look, I think the allure has been if you actually compare private credit to public credit performance over the last 10 or 15 years, it's pretty obvious, particularly with the top managers, that just private credit has outperformed public credit.

23:56And obviously that attracts capital over time. The growing market helps. But again, if you can show that lasting premium, and again, investors can take the leap to say, I'm willing to be a little bit less liquid in my underlying assets than I used to be. And I think that was hugely impacted by the lack of liquidity during the GFC. That's a pretty powerful combination. And then when you spray on some of the benefit of borrowers increasingly saying, wow, this is a really great product. I actually like having a bilateral relationship with Aries rather than having a public deal that can be difficult to amend or can be difficult to upsize or can be difficult to change.

24:41Yeah, one of the things that we and others can offer on the private side is we tend to put pretty long duration capital against this and we want to stay with our borrowers, really not looking for liquidity. We've had companies in the U.S. direct lending portfolio that we financed four or five times that have been a portfolio for 15 years. It's also great for the companies. They know they have a partner. They also know that that partner is there during maybe a tougher market or a more uncertain market, and that certainty is valuable. Some argue that private and public credit should exhibit similar volatility.

25:16You talked about the returns, but if we look at the risk side, you would think they would have similar volatility, yet private credit tends to be less volatile. And that's obviously partly because it has less liquidity and infrequent marking relative to public credit. How do you think investor behavior, which we know oftentimes buys at highs and sells of lows impacts volatility in these markets? It does. I mean, that's what it is, right? Inherent, if you have liquidity, you may pursue that liquidity at not the right time or at not the right price. And that's not necessarily driven by the underlying fundamentals of a company.

25:54It may be driven by the underlying fundamentals of that investor or a particular fund that values the liquidity. The good news about private deals is that you're setting them up with a philosophy that you'll be in them for probably three to five years. And so long as you set them up that way with that expectation to manage them through time, I don't think it's infrequent mark. I mean, we mark our assets quarterly. They don't trade daily. So obviously, without a daily trading price, they're inherently going to be less volatile, which I do think is appealing. but it also allows you to get access to good underlying fundamental collateral, we think, on the credit side, with a manager that knows how to manage for the long term and with an expectation that we're not seeking liquidity.

26:46And again, the vagaries of the market sometimes force you to look for liquidity if you're an investor at not the right time or not the right price. And that inherently is going to give you something that's going to be more volatile. It is interesting how liquidity can actually amplify investor emotions like fear and greed. It's us. And certain people are very good at using that liquidity to make money. And some people, unfortunately, use that liquidity to hurt their return. So going back to investors oftentimes pile in after good returns and jump out after bad returns, How do you manage the pro-cyclical cash flows?

27:24And how do you try to stabilize your capital base based on knowing that tendency? It's actually an interesting question around where we were on wealth, right? Because, you know, I'll take US direct lending. The way that we've set that up is starting with a public BDC, which inherently is very pro-cyclical, right? You have to pay a dividend quarterly, pretty much have to invest that capital, which means I hope you've sized your origination and your deal flow to be able to service the need for investment when it's there. The non-traded BDCs are the same thing. So when the inflows come in, you're a forced investor.