How Private Credit Took Over Wall Street

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Blair Jacobson: [00:00:00] When people ask me what the goal is of a firm like Ares in private credit, it's a very simple sentence: don't lose money. To go back to football, it's a very, very powerful business model. I grew up on Wall Street 30-some-odd years ago, but I have some unique insight into this. We have the CEO and CFOs of our companies on speed dial.

How did we do it?

Joe Cass: If something goes badly wrong in private credit over the next, say, twelve months, what do you think could be the trigger?

Blair Jacobson: We don't see any signs today in the portfolios of issues. Uh, a couple weeks ago, we reported publicly that our BDC in the US, which has over six hundred companies in it, was doing quite well.

Companies are growing their profits in the double digits. Credit statistics are trending the right way. So I think we're starting from a good place. The second thing would be that remember, for [00:01:00] something to happen to credit or private credits, certainly equity is the first loss. So a lot's gotta go wrong before private credit gets impacted.

I think the third thing would be last year we had Liberation Day, which wasn't fully anticipated in advance. We, we got through that, uh, okay. So I'd say a lot would actually have to go wrong before private credit is massively impacted.

Joe Cass: Financial crashes or, you know, recession, they are inevitable. They come, they're cyclical.

At some point, it's gonna happen. How well prepared do you think Ares is, and how well are you prepared your portfolios to withstand something like this?

Blair Jacobson: It's, it's a great question. When people ask me what the goal is of a firm like Ares in private credit, it's a very simple sentence: don't lose money. And that needs to be battle tested over time through a very, very specific investment strategy.

So the way we do it actually starts even before we have a deal. [00:02:00] Um, we have something like a hundred people in Europe, just to give an, an example, seven offices. We talk to one thousand five hundred companies in Europe every year, and we make new loans and investments into thirty, forty, fifty of those. So we're very, very selective in terms of what we do, and we say, "Oh, you're selective, but why?

What are you looking for?" Well, we're looking for companies that are leaders in their niche, that are growing well, but importantly, we have seen before through the GFC, through COVID, through shocks like Brexit or high interest rates, inflation, all these things, what companies did well. Uh, so we can actually look at their track record to make that determination.

That tends to guide us to certain industries, business services, healthcare, telecommunications, et cetera. So I'd say we have a pretty good filter that helps us stay out of trouble even before things start. Then when you look at the types of loans we make, 80, [00:03:00] 90% plus first lien senior secured. So if anything goes wrong, we're first in line to get our capital back.

Again, it's sensible loan to value. You know, the long-term loan to value in our space going back ten, 20 years is probably 50%, maybe even higher. However, we're currently in a space where we're more like forty or forty-five percent. So again, a lot of equity underneath our loans. Aries has a team of twenty-five people in Europe and fifty in the US that monitor our companies very closely.

It's their sole job. And one of the great things about private credit is we get numbers from our companies on a monthly basis. So it's, you know, in the public markets, it's maybe every three or six months, and there's a delay. We have the CEO and CFOs of our companies on speed dial because we tend to be either the only lender to the business or a meaningful lender.

And again, time is a real advantage if you can spot issues early and get out ahead of them. And I think the last thing I would [00:04:00] say is we have dedicated restructuring experts, you know, people who've spent their lives in this space getting our money back. And what that means, again, if, if a company's bought for, say, £100, and that would mean that our loan would be, say, forty-five, that means the value of the business has to deteriorate by 55% and stay there for us to lose £1.

Not to say it never happens, but the math is a challenge. So our view, by the way, is if there's an issue, we don't have to get the company back to £100 of value. We just have to cover our loan. If you look at our long-term track record in Europe, twenty years, US even longer, twenty-five plus years, our loss rates are like either negligible, one or two, three, four basis points.

And I think a lot of that is based on this model that I've just described to you

Joe Cass: How big is the Aries business today, and what areas of the business do you think will grow the fastest over the next few years?

Blair Jacobson: So we just announced a few weeks ago that we're now roughly six hundred and twenty-five billion [00:05:00] dollars of assets under management.

The growth, you're right, thanks for noting it, has been significant over the past few years. As you'll know, we're organized around credit. That's probably sixty, seventy percent of what we do. We also have real assets. That's real estate, infrastructure, and digital. Uh, we have a secondaries business. We have private equity business.

So we do a bunch of different things. Well, one area within our credit department that's growing meaningfully is our asset-backed business, which we call alternative credits. The TAM for what they address is massive, and what we're now seeing is that companies are very comfortable using private credit and private lenders.

That has now developed into an asset-backed opportunity. So that's everything from consumer mortgage loan books. It can be healthcare receivables. It can be music royalties. It can be NAV loans. Just so many different underlying areas to target. That is growing massive. About a fifty billion business for us.[00:06:00]

That's also where we house our investment-grade origination business, which is serving insurance clients. So again, lots of growth levers even within our credit business. And the last thing is wealth We were not in wealth, again, four or five years ago. We're now a top three player in the US. We think we're the largest, uh, here in Europe as well.

We really believe in the democratization of our assets. Frankly, m-many own these assets through defined contribution, uh, pension plans anyway, so for them to be able to access it on a high net worth basis or ultimately in the US, for example, through 401, that provides a real growth path. And again, just to frame it for you, um, wealth is now a $66 billion business for us.

We're raising four to five billion a quarter. We're seeing that expand now globally, started in the US, then Europe, then Asia. So I'd say those are a couple of growth levers, uh, for the firm.

Joe Cass: Anyone who visits this podcast will know that I support West Ham.

Blair Jacobson: Interesting.

Joe Cass: Th- through, through, for [00:07:00] better or worse at the moment.

But I'm interested to know around kind of the sports sector-

Blair Jacobson: Bowen's a great striker, you know,

Joe Cass: He is. That's, that's probably all we can say. But like, in terms of, you know, football or soccer- Sure ... specifically, I know Aries have been involved with, you know, really, you know, Atletico Madrid- Mm

Chelsea. What's the appeal there?

Blair Jacobson: Sure.

Joe Cass: Um, and, and what really is interesting for you?

Blair Jacobson: Sure. Well, let me, let me take a step back and just give you the origin story a little bit. This started for the firm as a bit of a passion project in that many of us, similar to you, we are sports enthusiasts. Sometimes we'll have investments in sports businesses, et cetera, but sort of part of the ethos and DNA of the firm and, and we've done things periodically, you know, going back, you know, sometimes over, over a decade in the space.

But what changed was around COVID. What you saw was these wonderful sports teams, and I'll talk to you in a little bit, uh, about what we like. Um, the live ticket attendance revenue [00:08:00] literally fell to zero, and our view was a lot of them needed help to survive what we believe was going to be a temporary cash issue.

And due to our personal relationships, again, this is a relationship business at the end of the day, um, we were first call for a lot of these really exciting, whether it's teams, leagues, et cetera, that needed some, some support. So that's actually how this turned into, uh, a business for Ares. We now have multiple funds and products.

We have a large investment team. Again, it's not only teams and leagues, it's data, it's ticketing. We also do, uh, media and entertainment, uh, associates. So it's actually quite a broad, uh, mandate for us as a firm. But to go back to football, and again, I've lived in the UK for 21 years, so for me, football is soccer, not American football, uh, at this point.

Um, it's a very, very powerful business model. When you look at the revenue that's generated through long-term sticky media [00:09:00] contracts, it's meaningful. And in particular, if you're looking at the Premier League and you're not a team that has a, a chance of being relegated towards the bottom, you have consistency, you have Champions League revenue.

It's powerful. You've got, uh, ticketing revenue, which I've mentioned before. You've got, you know, merchandise and branding and all these things. It's, it's a very, very powerful business model where you also have fans like yourself who've been following these teams and are very loyal through thick and thin.

Uh, I'm an Arsenal fan, and it's been a, a challenging 20 years for me. Maybe this is our, our year at the end of the day. But overall, we think that these are quite good businesses. And again, our strategy at Ares has been more around flexible capital. And, you know, overall it's, it's worked out very, very well.

I also sit on that investment committee, so it's always fun to double-click, uh, on the documents when they come across 'cause you never know what logo, uh, you're going to see. But again, overall, these are quite valuable assets, which historically had really been the grounds for wealthy [00:10:00] individuals or maybe benefits of league securitizations.

But now that's really opened up, and, you know, there, there are a couple players that do it, but there are real entry barriers, I think, in particular due to relationships and experience in the space where Ares is a, is a leader.

Joe Cass: It's interesting you say it's kind of a relationship business, and I guess in the COVID times, were you receiving calls from clubs or leagues kind of inbounds?

Blair Jacobson: It was both. Okay. Um, and again, both in the US, um, and in, in Europe. But again, their, uh, P&Ls or cash flow statements, you know, were, were quite stressed- Yeah ... when they just couldn't hold these, hold these matches. Even sometimes they did, there weren't people in the, in the stands, you'll remember. Um, so we actually generated, um, our own loyalty through supporting them through tough times, and I think Ares also developed a reputation as a value-added partner, which serves us today, you know, many years later.

Joe Cass: If I think [00:11:00] about the Ares business kind of at high level. Obviously you need to, you need to kind of en- ensure that there's investment return for your clients. That's number one, I guess. But a big part of the business must be the origination, kind of new business coming in the door. So- Well, how do these deals kind of end up on your desk?

You mentioned you've got kind of an origination team who are obviously going out there. Are they kind of just developing these relationships so that at some point through the year they'll have a tap on the shoulder? Is it-- How, how does that work?

Blair Jacobson: In particular, Ares has invested a lot in what we call origination.

And for the listeners, origination is a fancy name for finding deals.

Joe Cass: Yeah.

Blair Jacobson: It's sort of that simple. Um, in Europe, we have over a hundred people in seven offices. Uh, in the US, we have over two hundred people. So again, that enables us to talk to thousands and thousands of companies every year. But if I had to, um, you know, pin it down in a couple of key takeaways, I think the [00:12:00] first is reputation.

We've been doing this for twenty years in Europe. We've been doing it for even longer in the US. You know, we are known as a well-capitalized good partner for companies and their stakeholders to help them grow and reach their ambitions. So when you, when you have that market reputation, sometimes things find you.

But that's nothing to rest on your laurels, 'cause the second piece, this is where you were going, is people. And it actually goes to even before they joined Ares. Let me give you an example. Um, when we entered the European market in two thousand and seven, how did we do it? We lifted a team out of Barclays Bank, which was the number one mid-market commercial bank in the UK.

So with that team, essentially what they said was, "Hi, company or owner of company, you've been dealing with me for a decade or two at Barclays. Now I'm at Ares. Same guy, different business card, [00:13:00] but the product offer that I can bring you is so much broader. The hold size is more. The process is gonna be much more transparent to you and quicker.

We can offer all of these advantages." So actually it starts with hiring people who've been doing leverage finance their entire careers and have really good reputations in markets. That's also how we entered the French market, the German market, the Nordics, um, then Benelux, then Spain, now Italy, uh, just last year.

And the third thing is after you have those relationships, you start building up a real track record. And again, we've probably transacted with four hundred plus companies, uh, in Europe, by the way, with a hundred plus different owners that we've done multiple things with. But the really powerful part of our business is what we call incumbency.

What incumbency is, again, that's another fancy name, but what it means is we have an installed base today of hundreds of companies that are growing. I mentioned earlier when we talk about screening [00:14:00] businesses, we want businesses with real organic growth potential. And when we find these companies, we wanna continue to lend to them for as long as possible.

What that means is in the UK, for example, we have a veterinary care business. We found it when it had like three, four, five million pounds of profit or EBITDA. Now it's like a hundred and fifty, two hundred million. So we've backed it the whole time. Again, our companies are always growing. They want growth capital, they want acquisition capital, they want capital to refinance, or maybe they're being acquired by a new owner, and we want the management team to say, "I've had a great experience with Ares.

I wanna continue with them." So incumbency is, again, another really powerful entry barrier because we know the companies the best. By the way, it's once we decide we wanna keep backing, sometimes you know it and you don't wanna continue backing it too. Uh, but by and large, again, staying with our businesses through incumbency is probably the third most important part about that origination effort.

Joe Cass: And in the origination kind of process, just [00:15:00] interested personally, are you, are you going direct to companies? Are you being handed deals from kind of intermediaries? How does that split kind of usually look? Do you work direct- Sure ... or do you do both?

Blair Jacobson: So honest answer is both. The, the core of direct lending is just that.

Joe Cass: Yeah.

Blair Jacobson: It's direct. Um, we are capable, uh, of doing diligence, underwriting, legal doc, all, all these things ourselves. So again, you know, we, we, we cut out the middleman, so to speak. That being said, you know, companies often have advisors, which is fine, so that they can make the right decisions for themselves.

So it is also important for us to have relationships with legal advisors, accounting advisors, deal advisors, M&A advisors, again, to make sure that we're maximizing our deal flow and opportunities. I'd say we're like a little bit agnostic. We do go both ways, but what we don't do is have a situation where a deal is, say, underwritten by a bank, they're long some [00:16:00] exposure, then they wanna sell it off.

That we, we don't do because again, it is our goal to do all of that directly as much as possible.

Joe Cass: Yeah. Makes sense. Rating agencies within kind of private market space, they've been in the press over the past year. So what's your view of credit ratings in the private markets and particularly in private credit?

Blair Jacobson: I love doing this on an S&P- ... uh, podcast, so, um, uh, I appreciate the question- ... put it, put it that way. Um, here's how I frame it. There, there certainly is a role. When you think about the origin of rating agencies and what they're meant to do, you know, they are meant to look at a company's r- return characteristics and risk characteristics, and tends to be for larger companies that are liquid to give underlying investors some sense and comfort around what they're buying, in particular in areas where, again, they don't wanna make mistakes, whether it's IG or high yield or, or loans.

Now, the [00:17:00] private universe is a little bit different from that. Um, and going back to what I was maybe saying a little bit earlier, um, we find our own loans, we do our own due diligence, um, we tend to be the largest owner of our loans, and they're certainly illiquid. So again, in a way, we sort of do a lot of that work up front, and also that's what our investors expect us to do.

That being said, I would say in the last few years, we have seen ratings become relevant, in particular to our clients. So for example, what I said earlier on insurance companies. Obviously, insurance companies face rating agencies, um, because again, they have significant fiduciary responsibilities to their policyholders.

So when we book investments on either insurance company client balance sheets or for their benefit, there are often ratings associated, uh, with those investments that need to be looked at. Second area are banking partners. Um, as you may know, we, we [00:18:00] tend to use credit facilities, uh, for our funds. Again, investors can choose whether they'd like to take advantage of that or not.

And those banks often want some kind of rating to make themselves, um, very confident, uh, in what they're taking risk exposures on. Again, that's also required from a banking perspective. The third thing, and this is a little bit newer, um, rating agencies have long been affiliated with the CLO industry that backs liquid credits.

We've now seen, and we think we've been a leader in this, uh, private CLO markets develop, again, first in the U.S., now in Europe. And again, when you start creating a mid-market CLO and you think about tranching it up, having rating agencies involved there is obviously quite useful to the end buyers, uh, of those securities.

So overall, I think that there, there is a role, but it might be a little bit different than what is traditionally thought of, uh, as rating agency roles in, in the broader credit space.

Joe Cass: Do you think those guys, the, you know, the asset owners, the insurers [00:19:00] particularly, do you think they're kind of culturally a bit more open to, to dealing with someone like Aries than maybe they were in the past?

Blair Jacobson: I think they absolutely are. Again, when they look at, um, how the liabilities are forming and then what assets they need to hold against it to meet their own return on equity objectives, I would say that the alternatives portion of their balance sheet, 5 or 10% maybe, 'cause again, they do have to run relatively conservative investment books.

But we're also able to do is create investment grade, uh, investment opportunities for them that work for the rest of their book. And I think this is what's really exciting for them, 'cause again, what we're able to do is create IG-rated investment opportunities that tend to have a slight return premium to what might be available in the liquid IG universe.

Because again, we're self-originating these investments, we're structuring them [00:20:00] ourselves to sort of create a little bit of premium and alpha versus what they might like to buy. So to answer your question, yes. Um, I've, I had a conversation yesterday with an insurance company CIO. It's a big part of what we're focused on as a firm.

Joe Cass: There's a bunch of young people who watch. You know, when I say young, I mean kind of, you know, graduates-

Blair Jacobson: Right ...

Joe Cass: who, who watch and listen to, to the show. If you were a young person coming into the world of work right now, with the disruption we have with potential AI, GenAI, LLMs, et cetera, and this is, you know, only the beginning, what kind of advice would you give them-

Blair Jacobson: Sure

Joe Cass: to kind of carve their way and, and create a career?

Blair Jacobson: I'm still optimistic about young talent entering our industry and having very, very productive careers. Their day-to-day jobs might be a little bit different, but, you know, what we're looking for are people who, um, you know, are quite bright and creative and are systematic thinkers.

They can form relationships with people and counterparties. That's one thing that I think will never be, uh, disintermediated. [00:21:00] Now, I grew up on Wall Street 30-some odd years ago punching in numbers. Maybe those days are a little bit, uh, behind us. So I think, I think the key question that we need to figure out is what is the best way to train the next generation So that they can come and do Blair Jacobson's job, uh, someday in the future when we do know that the time they'll be spending slaving over models and the like, um, might be a little bit less than what's happened, uh, historically.

I think that's kind of the key question to figure out. That being said, you know, when I was young on Wall Street, we used to print out public filings and circle numbers and put them into spreadsheets, but that's been done by, say, FactSet or other providers for a long time. And, and despite that, we still have incredibly smart financial analysts on the team.

So I do feel like we will find ways to continue to adapt. However, some of these real analytical skills and soft skills will become even more important. And [00:22:00] again, if you're young in the industry, maybe your, your days will be more efficient, but you need to make sure that you are having the right takeaways, the right analytics to make the right investment recommendations, uh, within your firm.

Joe Cass: It's interesting. I always think about this kind of-- I've been thinking about this recently around, you know, historically, if you go, you're edu- you get some form of education, it's typically around, you know, a body of work or a content that you're studying- Mm ... whether that's, you know, politics or classics, whatever it might be, or maths.

So if you, uh, commoditize that to some extent, let's say. I mean, personally, when I was, you know, coming through the industry, there wasn't that much relationship training.

Blair Jacobson: Sure.

Joe Cass: There was maybe something on the side about building relationships. You need to make-- Also, by the way, you need to make sure you build relationships.

But I do wonder if the future will be more kind of relationship, relationship training driven, especially for these young graduates.

Blair Jacobson: Yeah, I'd make two comments. So, uh, similarly, uh, I'm still a big believer in education liberal arts. Um, I double majored in political science, economics. I minored [00:23:00] actually in art history, and here I am, uh, with an investment job.

Um, but I think what that enabled me to do was to think more broadly, more critically, um, and really, really adapt. So I think being taught how to think as opposed to what to think will become even more important. And the second piece where you were going is the EQ side of that equation, the soft skills side, I think has to become more important.

And in some ways, you know, is that born or taught? It's probably a bit, uh, a mixture of both. But what we found is it's not easy. So as we have staff that sort of migrate from junior level to mid-level to more senior level, your job changes. At a junior level, you're really crunching, you know, you're analyzing.

At a mid-level, it's more process management, whereas at a senior level, it is more external, and not everyone [00:24:00] is, is capable of making those jumps. So do I foresee more, uh, training in that regard over time as that becomes even more important? Yeah, I do. I would agree with you there.

Joe Cass: So I think it was about two years ago, I had Mike Arougheti, the co-founder of Ares.

He joined the podcast virtually, um, which was great. It was great. You know, it was a very good conversation. You know, you've worked with Mike for many years.

Blair Jacobson: Mm.

Joe Cass: Why do you think he's been so successful?

Blair Jacobson: Um, so Joe, you may know I have some unique insight into this because not only have I worked with Mike for nearly 15 years at Ares, I first met Mike 32 years ago, uh, in my first job out of undergraduate.

And actually, let me, let me pick up on a theme we were just talking about. When I joined, um, and again, maybe this makes some of the younger listeners feel better, I didn't know that much about finance, and I think at that time, Wall Street was taking more of a three, four, five-year bet on graduates like myself, less, you know, what we would do in the first year or [00:25:00] two.

And Mike was in my merger and acquisition team. He was a year ahead of me, sort of spotted me. Uh, he became a mentor early on and really helped me scale that very steep curve, uh, at the beginning of my career. And what I would tell you is even then you could tell he was, uh, a special guy. And I think Mike, and you know, maybe he'll, he'll listen to this, I think he embodies four really important characteristics that are rare, that you find all in one person, which are, number one, his IQ off the charts, incredibly bright individual.

And again, we spend our days with top decile people. He's like top decile of top decile. The second thing is his EQ. His ability to relate to people on a human level, uh, is incredibly strong. The third thing is his bandwidth. Obviously very hardworking, but he can dive deep into an individual investment, zoom out, talk about things going on at our company and everything in the middle.

And the fourth thing, he's just a, [00:26:00] a good guy. Um, and it is, it is rare, I think, in our business for me to be able to call my boss one of my really good friends in life. And I think culturally at Ares, one of the things we've done well is have people who have known each other a long time get along because again, maintaining culture in a company that now is over four thousand two hundred people in fifty-five offices, it's gotta come from the top.

So I think it's a really special advantage that we have that really benefits the entire business.

Joe Cass: Blair, it's been a pleasure. Thank you so much for joining me today.

Blair Jacobson: Thanks for having me, Joe. Uh, it was great fun.