Joe Cass   00:00:00

Hello, and welcome. My name is Joe Cass, Senior Director, S&P Global Ratings and the host and the creator of the FI15 podcast. On this episode, we have Lynn Maxwell, Chief Commercial Officer, S&P Global Ratings; and Michael Arougheti, CEO and Co-Founder of Ares Management. A quick reminder, the views of the external guests are their views alone, and they do not represent the views of S&P Global Ratings. Okay. Thank you so much, Lynn and Mike for joining me today.

Michael Arougheti   00:00:26

Great to be here. Thank you.

Lynn Maxwell   00:00:28

Yes. Thanks for inviting us.

Joe Cass   00:00:30

Okay. Cool. Mike, we'll kick off with you. Would you be able to provide an overview of where Ares sits in the financial universe, your area of focus and how you serve your clients?

Michael Arougheti   00:00:45

Sure. Thanks, Joe. Well, we -- I'm sitting in New York, where I spend most of my time. But we're actually quite uniquely positioned in the asset management space. We're one of the largest and most diversified global alternative asset managers. Today, we manage a little over $450 billion of assets with a big presence in the U.S., Europe and APAC with roughly 3,000 employees around the globe. What we have tried to build in our almost 30 years of history is a full-service offering to our clients in market and to our investor clients. So when you think about how do we serve our clients, you have to really think about who are our clients -- and I've always thought about Ares as having 4 key stakeholders that we serve. One is our clients in market, so the people who borrow from us or the companies who take equity investments from us. Those are core clients of ours. We then take those assets that we generate by serving those clients and package them for our investor clients. And we have close to 3,000 institutional investor clients around the globe that we serve as well as hundreds of thousands of retail investors through our non-traded and traded product. What excites me about the institutional part of our business is, obviously, we manage money for a lot of the largest sovereigns and insurance companies around the globe, pension funds, and so when you say who's our ultimate client on the investment side, it's the global retirement population. And so there's a real profound responsibility that's been placed on us to manage capital on behalf of those folks. And then obviously, I, at least as the CEO, think about our employees and their families as clients that we need to serve. And I think about our portfolio companies and the communities that we invest in as clients as well. So probably more than you expected. But in order, I think, to build a real durable, robust ecosystem, you have to think about who your customer is in a much broader way than you would in a typical manufacturing business, for example, when you're making something for somebody in one market. I think there's a much deeper set of entrenched relationships at play in our business.

Joe Cass   00:03:11

Great. Thanks, Mike. Lynn, as the Chief Commercial Officer at S&P Global Ratings, you're very close to clients, their needs and also their requests. What new or exciting areas within credit ratings are clients looking to explore right now?

Lynn Maxwell   00:03:29

So I mean, it's an extremely exciting time at the moment in capital markets because we've seen, at least on the fixed income side, we've seen historically tight credit spreads and a rate-reducing environment. So the markets are busy. In some cases, they're executing at the best levels they have ever. And so for our clients who like to tap into the fixed income markets, it's a great time for them to do so. But I think like Mike was saying, our customers are beyond the companies that just raised debt. We also talk to the investors and the investors are key stakeholders to us, insurance companies, pension funds, et cetera. And they're all really interested in new developments like generative AI. How is that going to change our businesses? And also, how is that going to continue to develop with the energy security needs that we have. So for example, on data centers, we have a number of requests around ratings for data centers, both in construction and already developed. And the reason for that is that we need more data centers. And so the financing for that is going to be essential if we're going to actually achieve the Generative AI goals that the various companies are focused on. Another area that customers are always talking about is around climate change and how to deal with challenges to their business that come from climate change and how they're preparing for the transitions that they're making in their businesses. So we've been looking at how do we assess that. So we do that through climate transition assessments, and we believe that gives a nice amount of transparency to the market. And then finally, I'm at the IMF this week and the future of emerging markets is really important. So emerging markets are expected to contribute 65% of global economic growth by 2035. That's enormous. So how do emerging markets do that? How do we enable emerging markets in order to be able to finance that growth? So great, really interesting themes, and I think one also very close to Mike's heart is the increased growth of private credit, which we've seen as a major theme in the markets over the past couple of years.

Joe Cass   00:05:43

Great. Thanks Lynn. Mike, can you talk us through the current macro environment, so including rates, inflation and what that means for you as an investor?

Michael Arougheti   00:05:55

Yes. Again, we run a global business. So it means slightly different things in different markets. So what we're seeing in terms of the trajectory for rates is different in the Eurozone than it is in the U.S. market. But maybe honing in on the U.S. market, which is where the majority of our exposures are today. One of the nice things about the business that we've built is we have private investments in what I would call real economy companies and real economy assets that give us a close to real-time view of what's happening on the ground. And that obviously informs on where we invest and how we invest. And what we're seeing in the portfolio, which has been the case for the last 18 to 24 months is continued fundamental strength, and we've been quite public that the signals that we've been seeing in our portfolio were not calling for a recession, and we took a position that rates would stay higher for longer. As I sit here today, I still believe that to be true. The employment market is still quite robust. The consumer is exhibiting significant resilience. You're seeing that come through in consumer spending. You're seeing it come through in the jobs reports. So our view is the U.S. economy is still on strong footing. Obviously, rates are on their way down. We don't think that they will be coming down as quickly as maybe the market is forecasting or hoping for. And so what that means for us as we invest is we are trying to stay longer credit. That's been a great place to be as rates have been high. We are not seeing distress in the credit markets the way that you would typically see if you felt that you were deep into a credit cycle. And now as rates are coming down, we're beginning to get on our front foot on real estate and infrastructure, which were quite slow in terms of new activity and transaction volumes while rates were on the rise. So we're pretty active across most of everything we do, just given how benign the economic backdrop is.

Joe Cass   00:07:57

Thanks, Mike. Lynn, S&P Global Ratings has a significant presence in both the public and the private markets. How do you see these 2 areas intersecting and influencing each other in the future?

Lynn Maxwell   00:08:13

So I see public and private markets as being really complementary to each other. The feedback we have from the companies that we deal with is that sometimes they want to fund in private markets for reasons of relationship with the funds that they're dealing with. Other times, they want to go into the public markets because they want to keep a public curve or they want to keep supplying bonds to their investor base in the public markets. But I think over the course of the past couple of years, it's changed from being a sort of tension between public and private to being actually a complementary approach where a company might decide at some point in its funding that it wants to go public and then at other points in times that it wants to go private or it might have a combination of the two. And then the other area that we're seeing is the crossover on the investor base. So investors who have historically been very active in public markets are now very active in private markets and have been for the past few years, right? They've been growing their investment in private funds. And we can see that because we are having more and more requests for ratings on our funds or lines that are there to fund funds like NAV lines and subscription lines. So we can see the investors are very, very similar between public markets and private markets and that overlap is good because at the end, it's all about credit fundamentals. So those investors are playing in both parts of the market.

Michael Arougheti   00:09:47

Yes. I'm glad you heard Lynn talk about that because obviously, we're a predominantly private market practitioner. And I think there's been a little bit of a false narrative of, it's either private or it's public. And the way that we think about it really and our investors would echo this, investors take equity risk and they take credit risk. and generally want to get paid an adequate return for whatever risk they're taking. When it comes to public or private, it's really just a function of what is someone willing to -- what is someone expecting to get paid for illiquidity. But the exposures are generally the same. And so I think there's this false idea that when you buy private equity, you're somehow taking a different set of risks than when you're buying public equity, and you are because of leverage, et cetera, but it's still equity risk and there's an equity risk premium. And the same is true for privates. So when you see privates growing, they are symbiotic with public. That being said, they are outpacing the growth in the public markets because in order to provide the liquidity that the investor requires in the public fixed income and public equity markets, there's just less structural flexibility than you can have in the private markets. So I think as private markets have evolved and matured, there's been more creativity and flexibility that's been introduced. So if you're an asset owner or a company owner, you can stay in the private markets longer and evolve your business plan without being in the public market. But you can't have a robust private market without the complementary public markets access. So I'd agree with Lynn, but I think we have to get out of this habit of talking about one or the other as though they're different. I actually think that they're offering the same types of outcomes. It's really a question of liquidity and flexibility.

Joe Cass   00:11:45

Great. Thank you both. Mike, keeping to the topic of private markets. What do you think has driven the recent growth in private market popularity? And do you think it creates an increased need for transparency in private markets today?

Michael Arougheti   00:12:02

So maybe building on what I just said, the reason private markets are growing, and they're actually not -- they're growing probably slower than many people think because they're new to some people. So it's almost like now that they're seeing the growth in private markets, maybe they feel like they're growing disproportionate or that there's more risk in those markets. Private markets are growing, A: because the number of companies available to invest in, in the private markets is significant. So just as an example, if you look at the U.S. economy, in the U.S. economy, there are 18 million private companies. 30,000 of them have revenue in excess of $100 million and 5,000 of them have revenue in excess of $1 billion. If you look at the publicly traded markets for domestic issuers, there's about 4,000 publicly traded companies, which is half the number of publicly traded companies from 25 years ago. So if you do not invest in the private markets, you're effectively saying, I don't want to invest in 95% of the investable opportunity in the real economy. And that's just the U.S. So I think the reason that private markets are growing the way they are is you have appetite for private capital, as I mentioned, more flexibility, more creativity to support the growth of small business. And then for the investor, you can offer much more flexible investment outcomes, right? It's not prescriptive that if you have this rating in this structure, you get this return. So there's a lot more degrees of freedom for investors and managers to create investment outcomes. I'm going to push back on your question about transparency because this is also, I think, part of the false narrative of public versus private. There's an extraordinary amount of transparency in the private markets. I would argue, at least for the investor, more transparency in the exposures they have than in the public markets. So if I buy a public stock, I get quarterly financial statements. There's a lot of rigidity and structure for obvious reasons around what information I get, when and how. In the private markets, when I offer a fund into the institutional investment community, they have perfect access to the private side information of what they own, how that company is performing on a month-over-month basis. They can pick up the phone, talk to us directly about their exposures and risk in the portfolio. So again, I don't think there's a lack of transparency to the investor in the private market. So I think when we talk about is there a need for more transparency, again, it's through the lens of the traditional regulatory structure of the public markets, right? -- disclosure regime, ratings regime, et cetera. But that to me doesn't translate to transparency. And I think that for those who have broad-based private market portfolios, they probably have better grasp on the risk that they're taking in those portfolios than they actually do in the public side.

Joe Cass   00:15:11

Great. Thanks, Mike. Lynn, we mentioned this before, but how do you think AI will integrate into a commercial role over the next few years? And how should sales people best position themselves to benefit from this kind of technology?

Lynn Maxwell   00:15:27

So I think AI has use cases across all of the different businesses, including commercial or relationship management. I almost see generative AI as being like the magic reveal pen that you use when you have tons and tons of data that is actually really difficult to manage. What generative AI does is it actually helps you to take that data and make some sense of it. You still need the human overlay on that, but it just takes what is really difficult, be it Salesforce data or other sort of platform data. And it takes it and it lets you start to assess what is actually in that data, whether it's senses of insights as to what customers are saying, products that you might be able to talk to the customer about that they may not be familiar with. But I think overall, generative AI is incredibly useful as that kind of first piece, that first step of taking the data and assessing it. We're using it quite actively at S&P Global. We have a partnership with Accenture, and everyone is being trained at S&P Global on how to use generative AI, and it's a great program and the feedback I have from the teams is fantastic. So they're really getting upskilled on how to use it. Some of the use cases I've heard are, our marketing team looking at how they can use generative AI to assess the impact of their marketing campaigns, Salesforce data being looked at in order to assess kind of how customers are doing, how they feel about our service. So lots of other things that will develop over time as well. But I think that first training everybody on it, making sure that they play with it and they start to use it and get some insights from it is step number one.

Joe Cass   00:17:14

Thanks, Lynn. Mike, how are Ares looking to integrate AI into your team's workflows? And what kind of role do you think it could play in research or investment?

Michael Arougheti   00:17:25

Yes, it's something we're spending a lot of time on. But I think like most things, we want to be measured because for every opportunity that comes with unleashing the power of AI, you introduce risk around quality of information, quality of output, confidentiality of information, protection of IP. So we have a very robust governance framework. That was the first step to make sure that we understood the use cases and the technology implications before we began to roll out. We actually -- and this was not heavily publicized. We acquired a small team of technologists that were early pioneers in the AI investment space, and we brought them into Ares and merged them into our corporate strategy and corporate development group and opened an office of technology and innovation. and effectively ask them to think about 3 things: one, how do we use AI to make Ares more efficient? What can we do in our own operational processes to actually use AI to drive efficiency. Two, how do we unleash AI into our portfolios so that we can actually improve performance in our underlying portfolio companies, which is obviously value creative. And then three is how do we actually think about using the AI to drive investment outperformance. And that, to your point, is how do we take all of this private side data, use it appropriately to get insights into what's happening in the global economy and the global capital markets that may change investment behavior, may inform the way that we underwrite new investment. And so that's kind of the 3-pronged approach, and we've gone through a pretty exhaustive nearly year-long work stream of prioritizing all of these use cases to figure out where we think the highest ROI is and now we're deploying the technology in those 3 cases. And then lastly, which I think is obviously talked about a lot, but I want to go back to what Lynn said earlier, one of the biggest opportunities, at least for folks in investment management that's coming from AI is just the rapid proliferation of hyperscale data centers. And there is a massive supply-demand imbalance that exists today in the funding markets in order to meet the demands of generative AI. And so folks like Ares and others are obviously putting a significant amount of capital and human talent against the development of data center assets and merging that with our in-place renewable energy capability to make sure that we're actually benefiting from that secular trend. So there is a first order opportunity that's been created generally in the investment management business from the proliferation of AI.

Joe Cass   00:20:21

Great. Mike, could you talk a little bit about the real early days of Ares? What was it like to co-found the company? What were the main challenges you faced, including any anecdotes or stories?

Michael Arougheti   00:20:36

It's - 'anecdotes and stories' it is funny because they're all let's say, the best way I could describe it, which is hopefully, we still have some of this today. One of our core values at Ares is entrepreneurialism and another is collaboration. And I would just say that those early days we were in start-up mode. We were a small group of people in one office with a limited product set kind of trying to build a business against a pretty dynamic market backdrop. I think we had a sense early that we were going to see exponential growth in the private markets. I think we were in a fortunate seat within the markets to understand how capital is beginning to form around private equity and private credit and real assets. But it was dicey. -- as you would imagine, any time you're a start-up, there are ups and downs and successes and not. And I think what we also try to remember because a lot of those founding partners are still here and active in running the business is when you're in start-up mode, you have a higher tolerance for failure than you do when you get to be a larger company. And so part of the entrepreneurial bent of the business is a willingness to fail that I think is just critically important to continue to sustain the type of growth and innovation that we want. It's not to say that we encourage people to fail, but it's to make sure that people understand that you have to take enough risk in the investment business and in the business build to fail as long as the organization is able then to understand what worked and what didn't work and then translate that experience into future decision-making. And so that's still a core part of how we think about running the company and how we think about growth. We're not going to get everything right, but over 30 years, we've made a lot of mistakes, and we try not to repeat them. And we've also done a lot of things right, and we try to take that positive experience and amplify it and replicate it wherever we can. There was a joy about the place, too, which I think most people who start businesses will tell you, you're constantly chasing those early days of just kind of everybody running to do whatever is needed. In our first office here in New York, I remember we went down to Best Buy and bought the floor model, television, hung it ourselves, laid our own hardwood floor. So 25 years ago, we were on our hands and knees laying veneer wood floor in our pantry to today having 40 global offices. So a lot changes, but what I always try to remind people is don't lose the memory of what it felt like to be on your hands and knees putting a floor down because that shows a sense of ownership and investment that you never want to lose.

Lynn Maxwell   00:23:42

I was just going to ask Mike just -- because I think that's a fantastic story. And I think it's interesting to see like in such a short period of time, you've gone from laying floors and kitchens to managing a huge amount of wealth. I think it's always a challenge as companies get bigger to continue to instill that concept of like failure is okay because it shows that you're going far enough as far as new ideas go and like fail forward, this concept of like let's learn from it and move forward. I mean how do you keep that attitude as you get bigger and bigger?

Michael Arougheti   00:24:18

We talk a lot about it is really the answer. Again, we're fortunate that a lot of the people who are looking after businesses here have been here for 15, 20, in some cases, 25 years. So that DNA replicates and it gets passed down from generation to generation. So we have a whole class of partners here now at Ares that started as analysts. So a lot of it is organic. But to your point, when we articulate what our values are, we have to constantly talk about whether or not we're actually living them and abiding by them. And so we spend a lot of time at Ares talking about investing because that's the core business. But we spend as much time talking about the culture because, again, culture drives investment performance. And the idea of failure, it's tough because the investment business, ultimately in private markets is largely built on trust, right? You have to create trust and build trust with the people who you're investing in. And then you're largely making very significant high-risk investments by building consensus around an investment committee table. And if you don't trust the people around you to bring up difficult topics or really challenge you without disrespecting you, you can't actually scale an investment business. So if you really want -- in my opinion, if you want to do private markets investing well, you have to always be talking about trust and culture alongside the investment process. Otherwise, you're going to make a lot of mistakes.

Joe Cass   00:25:58

Fantastic. Great. Thank you. Lynn, you joined S&P 4 years ago from banking, and you've had the responsibility of building the business, really, at ratings. How have you gone about doing that? And has your background in law and banking influenced or informed your career in your current role?

Lynn Maxwell   00:26:16

I mean I've been really lucky in my career because I have gone from being a lawyer to then being a banker and now running a fantastic commercial team at S&P Global Ratings. I think you pick up different things as you go along. Obviously, in law, you're trained. It's a great place to start any career, as I say, to my kids. And whether you end up in it at the end or not, it's actually really good for sort of learning the basics around all kinds of things, logic, problem solving, how to read long documents, things like that. Banking was great and a really natural transition for a finance lawyer into banking. And it is an incredible career because you can build out the financing that's needed for real economy growth. And you can learn how to break down big problems and figure out how to implement solutions. So I think I've obviously gained some massive skills through those roles. But ultimately, when I think about how I build the team and build the business at S&P, it's about the people. So I mean, I've been really lucky to work with incredible people, incredibly smart people through my whole career. And what I see is that if you want to build a business, you've got to build it with the right people. So I really focus most of my time on making sure I've got the right people in the team. And then to Mike's point, I think culture is also really important. So working as a team, my leaders working together, supporting each other and helping the business to grow that way.

Joe Cass   00:27:59

Perfect. Thanks, Lynn. Mike, we spoke about this briefly off there, but you're the co-owner of The Baltimore Orioles alongside David Rubenstein, who is -- I'd like to think of him as a friend of the show because he's appeared twice -- how did you get the opportunity to co-own the team? And what are really the real-life highs and the lows of being an owner of a sports star?

Michael Arougheti   00:28:24

Look, it's been a great ride. How'd it happened? I'm a lifelong sports enthusiast and obsessive baseball fan -- love the sport. I love the math of it, and I love this virtuality of it. So I've always wanted to get closer to the game. And so as I just progressed through my career in my life, I was always looking for ways to get more involved in the league. Without going into every conversation, I had come close with a couple of other partners on some other situations, one of which had me calling David to see if he wanted to partner -- and in that conversation, we talked about how it would really be ideal if the Baltimore Orioles came up because it would be a nice marriage of his love of baseball and love of Baltimore and desire to kind of give back to that community and my desire to kind of be closer to baseball. And so we formed a real, I'd say, quick partnership around the idea of doing something. And then about a year after that first conversation for a whole host of reasons, the opportunity came forward and David picked up the phone and called me, which is why I love the guy and said, "Hey, remember that conversation we had a year ago, you still want to partner with me on buying the Orioles. And obviously, I said yes. And it's been really gratifying. The community building civic piece of it has been incredibly gratifying and when you own a team versus being a fan, you feel a deeper sense of responsibility to the city and community, particularly in Baltimore, which has a history sadly losing sports teams and now only has football and baseball. And so there's just a real deep intersection of the Orioles and the social and cultural fabric of the city that I knew going in, but I didn't really appreciate how profound that would be and what that responsibility would feel like. And then two, having been a lifelong fan of the game and watch games constantly, when you own the team, you kind of become a super fan. And even though anyone will tell you, don't become a super fan because emotionally, it's too much, at least in your first year, you kind of feel every pitch and every swing of the bat because you're so invested, right, not financially, but you're so kind of emotionally invested in the outcomes because when you come into a situation like the one we did, we want to win, and we want to make sure that we can deliver a championship to the city of Baltimore. And so again, it takes on a weight that you just don't feel when you're a casual fan. And so that's been -- that was eye-opening too. I now know kind of going into the off-season that next year, I have to be a little bit more measured with the way that I interact with the games because I'm not going to make it otherwise. But -- everyone always says if you're not stressed about something, then you don't really care about it. So I know that just based on how I got through this season like I have and David as well, just a deep commitment to trying to win. And when you're that committed to winning, you kind of -- you get heavily invested.

Joe Cass   00:31:57

Great. Thanks, Mike. Lynn, you're a Board member of the charity 1001Fontaines. Can you talk about the charity, what it means to you and how you've been involved over the past few years?

Lynn Maxwell   00:32:10

Yes, I'd love to talk about it. So 1001Fontaines is a clean water charity. It's been operating for about 20 years in Southeast Asia and Africa. And basically, it solves for the problem of rural communities that don't have access to clean drinking water. They're sort of off the water grid in their countries. And it's a great model because what the charity does is it supplies water kiosks on the ground in given communities. It establishes a local person to be the entrepreneur who runs the water kiosk. -- and the charity provides ongoing support to them, technical support, water testing, marketing support, things like that. And then the charity also subsidizes clean water in the schools in the community. And it's proven to be really viable as this combination of entrepreneurship and charity because the idea is that it would be sustainable after a charity were to leave. And so it's really a win-win across the board. You've got clean water coming to the community, which is reducing child mortality. You've got an entrepreneur, a local person getting a job and building a business and often employing people in the community. So -- and then I guess there's also the fact that the community gets a water factory, which allows them to be less reliant on single-use plastics because they can just go and get their water refilled from the water kiosks. So really great model. And I've been really excited to be a trustee. I went on a field visit to Cambodia earlier this year, and I saw the excellent work of both the water entrepreneurs and also the local team on the ground who are helping to support them. That was just a great, great experience.

Joe Cass   00:33:58

Excellent. Thanks, Lynn. Mike, last question goes to you. So what's the best piece of advice you've ever been given and who gave it to you?

Michael Arougheti   00:34:11

I've been asked that before, and I should probably dig deep, deep, deep to make sure that this -- it's true, but I have high conviction on this. It's probably my grandfather and my father. And I think the simple advice that has always guided me was all you have is your reputation and your name, number one. And number two, which is kind of a corollary is, as a result, don't ever forget who you are and where you came from. And the reason I start there, it goes back a little bit to the conversations about culture and how you build culture and how you build authentic trust with people. And I think all too often as a leader, you can kind of forget where you came from. And my experience has been that you need to practice humility and service and gratitude in your daily life when you're leading. And so every time I ever have felt that I was kind of -- my ego is getting too big for -- or I wasn't making heart-based decisions the way that I should, that voice in my head of my grandfather and father just kind of saying, it's your reputation and how you do your business that ultimately is the measure of a person. And so I've read every management book, and I think everybody has, and there are all these great pieces of advice that people can give you. But for me, that's just such a core fundamental that it's important just to -- for me has been a north star.

Joe Cass   00:35:54

Yes. Fantastic. Well, thank you so much, Mike. Thank you, Lynn, for your time today for everybody watching, everyone listening. See you next time on Fixed Income in 15.