ARES Credit Group Podcast

In this episode, Brisbane Partner and Financial Advisor at EW&L, Ryan Loehr, speaks with one, but two specialists from Ares Management, a leading alternative asset manager responsible for over $600B across credit, private equity, real estate, and infrastructure asset classes.

Joining us is Samantha Milner. Sam joined Ares in 2004 and is a Partner, Portfolio Manager and Head of U.S. Liquid Credit Research. Sam is responsible for managing Ares’ US bank loan and liquid credit strategies and has an extensive background in financial restructuring, advising on distressed mergers, acquisitions, and private placements. Sam is based out of LA; United States and we are fortunate to get to spend time with her whilst in Australia.

Additionally, we are joined by Teiki Benveniste, Head of Ares Wealth Management Solutions in Australia.  Teiki is the client portfolio manager for Australian investors, and is well-tenured, previously coming from Macquarie group as a senior investment specialist and before Macquarie worked for Société Générale in London as a credit analyst and syndicated loan trader.

For regular listeners, Ryan has increasingly spent time covering private and liquid credit from various, leading fund managers. In this episode, Ryan does something a little different, by comparing the different characteristics, the pros, and cons of both private and traded loans, and the role that each can play in client portfolios.  Teiki and Sam provide some invaluable insights, and we hope you enjoy this episode.

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Please see the transcript of our discussion below -

[00:00:00] Ryan Loehr: Welcome to the exchange podcast by EWL. As advisors to some of the most successful families in the country. Craig Emanuel, Tim Whybourne and I, Ryan Loehr, draw upon some of the best minds in the country. We believe that by exchanging ideas, we can deliver better advice and better outcomes for the families we worked for.

[00:00:32] Ryan Loehr: Now, we're inviting you on this journey. In this podcast, we interview some of the country's best investment managers, business advisors, bankers, and founders to share their valuable insights. And our hope is that with better information comes better decisions, helping you to achieve more financially.

[00:00:53] Ryan Loehr: Welcome to another episode of The Exchange by EWL Private Wealth. My name is Ryan Loehr. I'm a partner [00:01:00] and financial advisor, and I'll be your host today. In this episode, I speak with not just one, but two specialists from Ares Management, a leading alternative asset manager responsible for over 600 billion managed across credit, private equity, real estate and infrastructure asset classes.

[00:01:21] Ryan Loehr: Joining me in the room is Samantha Milner. Sam joined Ares in 2004. She's a partner, portfolio manager, and the head of US liquid credit research. Sam is primarily responsible for managing Ares U. S. bank loan and liquid credit strategies and brings extensive background in financial restructuring, advising on distress mergers, acquisitions, and private placements.

[00:01:49] Ryan Loehr: Sam is based out of LA in the United States and we're very fortunate to get to spend some time with her while she's in Australia. Additionally, [00:02:00] We are joined by Teiki Beneniste, Head of Ares Wealth Management Solutions in Australia. Teiki is a Client Portfolio Manager for Australian Investors and is well tenured, previously coming from Macquarie Group as a Senior Investment Specialist, and prior to Macquarie, worked for Societe Generale in London as a Credit Analyst and Syndicated Loan Trader.

[00:02:24] Ryan Loehr: I've held several discussions recently covering opportunities in private and liquid credit. And in this episode, I wanted to do something a little bit different, really comparing, contrasting the different characteristics, the pros and the cons of both private and traded loans, and the role that both asset classes can play in client portfolios.

[00:02:47] Ryan Loehr: Teiki and Sam provide invaluable insights, And I hope you enjoy this episode. Today. I have the pleasure of speaking with not just one, but two key investment members of the Ares [00:03:00] Global investment team, Samantha Milner and Teiki Beneniste. For those unfamiliar with Ares management, it's a leading global alternative investment manager.

[00:03:10] Ryan Loehr: Responsible for overseeing 600 billion in capital across credit, private equity, real estate, and infrastructure. So Sam and Teiki, thank you so much for joining me today. 

[00:03:21] Samantha Milner: Thanks for having us. 

[00:03:22] Teiki Benveniste: Yeah. Great to be here. Thank you. 

[00:03:24] Ryan Loehr: For those who have been regular listeners to our podcasts, you've probably noticed my increasing attention towards credit and that's both liquid traded as well as private credit.

[00:03:35] Ryan Loehr: And after decades of low rates, investors are now being paid meaningfully for allocating to this asset class. And the levels of return really offer on offer rival, the long run returns from equities with less volatility and arguably a lot greater security. So Sam, I might hand it over to you. Do you mind providing a bit of a backdrop for our listeners as it relates to the past decade for this asset class really [00:04:00] posted the global financial crisis?

[00:04:02] Ryan Loehr: And in particular the changes and the, opportunity set, how that's changed to provide investors attractive returns today. How do we get here? 

[00:04:12] Samantha Milner: Thanks, Ryan. You summed it up well. I mean, in terms of we're finally getting income in fixed income and just given the change in the rate regime, you can get, call it eight to 10 percent in current income and what we're calling, high yield bonds, leveraged loans.

[00:04:29] Samantha Milner: And the high quality parts of CLO debt. So you have downside protection, you have security for the most part, either in the form of single name security or structural subordination with respect to CLOs. And you're also like lower duration when you look at alternative fixed income. So you're not really having to take a rate view, but clipping a great current income of call it eight to 10%.

[00:04:52] Samantha Milner: And what that gives you is it gives you a cushion because. We're not going to say there's no risk out there, right? We have a lot of things this year, whether it's the [00:05:00] presidential election in the US, whether it's CRE, commercial real estate whether it's a softening lower income consumer, we have a lot of geopolitical risks.

[00:05:09] Samantha Milner: And so we do expect some volatility. So having a safe spread and having this high income really provides cushion if spreads, do widen. So that's definitely one change that we've seen the last few years, given the, the rising rate. I would say the 2nd big shift has been post the global financial crisis.

[00:05:27] Samantha Milner: You've seen the bank step away in terms of their, we call them prop desk, proprietary training desk. So there's been, they would normally step in during periods of drawdowns, but what's happened with them, not in the market. When there are sell offs, like when you saw March 2020, you see very quick sell offs, very severe sell offs, but it's very quick where the markets tend to recover, so if you miss that, if you're not invested, then it's over.

[00:05:54] Samantha Milner: And so it used to last, two years or three years or even one year, but now these, there's more frequent [00:06:00] bouts of volatility. And then they're sharper. So you have to think about a fund or an asset manager that can dynamically allocate across asset classes. 

[00:06:09] Ryan Loehr: Yeah, absolutely. I think active manager in this space, having scale in this space is definitely key.

[00:06:15] Ryan Loehr: And I think for the Ares business, credit is really, in the DNA. Of the business. I mean, you compare it to other managers out there and, they might have started in private equity and branched into credit. I think a key differentiator with the Ares business, is just that history, that DNA and with that in mind, I might just hand it over to Teiki briefly to talk about, the Ares business for our clients, for listeners who aren't as familiar with it, And I think particularly knowing, you moved across from Macquarie, not that long ago, I mean, out of the businesses out, out there in fixed income, in credit, why choose Ares because, Macquarie is a great organization you've obviously made that choice proactively, what was it that attracted you to the business?

[00:06:58] Teiki Benveniste: Yeah. I mean, 

[00:06:58] Teiki Benveniste: that's a, that's a very [00:07:00] personal question, but I think before I was at Macquarie, it's important to know that back in Europe, I was actually trading syndicated loans. So I come from a credit background. I come from the same origins, if you want as, as Ares, which is leveraged finance.

[00:07:15] Teiki Benveniste: And when that opportunity came up, I was pretty much I was very well aware of the scale of Ares their leadership position in direct lending, but also in liquid credit. And that was very attractive to me because there's one thing that I know in credit that scale is your friend. The bigger you are.

[00:07:34] Teiki Benveniste: The bigger funnel you have, the more selective you can be. If you have the right culture of collaboration and sharing information across the various parts of the business, then that funnel also becomes a great tool for selectivity and being a better investor. And I could really see that at Ares.

[00:07:52] Teiki Benveniste: I could really see it was in the culture to collaborate and you said it, I mean, that credit DNA, it just gives a different lens, [00:08:00] I believe, personally, In terms of how you look at investment opportunities, you're going to be really more focused on the downside. You're not going to stretch for that extra 50 basis points.

[00:08:12] Teiki Benveniste: Maybe you have spread by giving up on structural protection. For example, these are things that. Really when they're embedded in core to the way you do things, I think make you a better credit investor. And so when the opportunity came up for me, it felt like a match made in heaven. 

[00:08:31] Ryan Loehr: I might actually pivot and do something.

[00:08:34] Ryan Loehr: A little bit different to what I've done in other podcasts, particularly with credit managers. And this is more so for, I guess my own interests. I think, there's great opportunities in listed. Sorry, liquid credit, traded credit. There's great opportunities in private credit and over, different conditions over a full cycle.

[00:08:51] Ryan Loehr: Different environments are more or less supportive of. Both of those. So Teiki, I might get you to wear the private credit or direct [00:09:00] loan hat. And Sam, if you don't mind, I'll let you, wear the liquid credit hat. And, I really want each of you to kind of touch on really, what are the positive attributes?

[00:09:12] Ryan Loehr: Of both options. What are some of the drawbacks? What are some of the nuances, or the kind of different structures that underpin them that investors should be thinking about. And finally some of the misconceptions, which I know there's a lot in there. But I might yeah, Sam handed over to you first just to unpack that a little bit.

[00:09:31] Samantha Milner: Absolutely. So the name Liquid, right? That obviously you, the, the biggest benefit. You, you have the liquidity to either provide to the client if you want your cash back quickly to rotate into other asset classes. And the liquidity also enables us to dynamically allocate across different asset classes when relative value changes.

[00:09:53] Samantha Milner: Across different credits and across different sectors. So if you stand still in credit, you underperform. So we've [00:10:00] done an Ares through many cycles is we're able to change our positioning again, through sectors, through asset allocation, geographies, credits, et cetera following the best risk adjust returns.

[00:10:12] Samantha Milner: So that's the, I'd say that the biggest benefit of, of liquid I would say the downside is certainly the volatility. While it's our friend, you certainly have to answer to someone. So in March, 2020, when these asset classes were down 13%, you know that you look at your book, you have to answer to your client and say, yes, we feel pretty good about them returning to par.

[00:10:35] Samantha Milner: We don't believe there's a lot of principal risk, but you're marked to market. Could scare some investors in periods of 

[00:10:43] Samantha Milner: drawdowns. 

[00:10:44] Ryan Loehr: Yeah, that makes sense. I mean, it's an interesting point. I mean, obviously with liquid credit, I mean, any listed assets or liquid assets. I mean, you have that mark to market volatility, and I guess that's been a key point of contention across private assets more generally, even, locally here [00:11:00] big Australian super funds, they might have private equity holdings that, The valuation hasn't changed for six months, for 12 months.

[00:11:08] Ryan Loehr: And from a price perspective, maybe that gives some investors comfort, but, from an advice perspective, it makes us, wonder, is that a good thing or are you hiding volatility? I mean, how do you actually accurately price or gauge fair value? Off. Private loans, if you're not getting that kind of mark to market.

[00:11:29] Ryan Loehr: And that constant review that with that mind you know, Teiki, any comment there? 

[00:11:34] Teiki Benveniste: Yeah, sure. I mean, it's extremely topical at the moment. You see it in the financial price quite often being discussed. And for us, we've, we've taken a view a long time ago that private markets are opaque, and therefore it's

[00:11:49] Teiki Benveniste: the duty of the manager to provide some transparency. And that includes valuation. So when we look at some of our strategies that offer access to direct [00:12:00] lending with some level of liquidity, we're very much focused on making sure that our valuation policy is of the higher standards as we believe.

[00:12:09] Teiki Benveniste: And that means, having third party providers looking at your book of loans and giving marks, it means doing it on a monthly basis. If you if you have to to to provide that constant review of the book and not just looking at The performance, the fundamental performance of the credit, but also saying, well, we've issued that loan at, let's say, base rate plus 500 basis points of credit margin.

[00:12:40] Teiki Benveniste: But right now, we're looking at the market. We're looking at the environment and for the same risk. We could get base rate plus 600. Then we will show that in the price of the loan. So you'll see a drop in the price of the loan because that means that people coming into the fund at that point in time [00:13:00] get the risk of now with the price of now, not the risk of now and the price of yesterday.

[00:13:05] Teiki Benveniste: Yeah, so that's something that's important for us, even on the private start on the inside of things to to provide that transparency 

[00:13:11] Teiki Benveniste: and fair valuation. 

[00:13:12] Ryan Loehr: Yeah, that makes sense. And I guess on the private side, I mean, have you seen a greater number of businesses listed, unlisted? Turning to private markets, obviously with, regional banking issues in the U. S. Um, some of the liquidity issues that we've had over the past 12, 18, 24 months. I mean, how has that changed the dynamic for credit? And I guess. One of the positives for a platform like Ares is, you're not just kind of one or the other. You've got the flexibility to provide, the solution for, your, your end borrower.

[00:13:46] Ryan Loehr: So they've got that optionality of both. But how has that changed over the last, 18, 24 months? 

[00:13:52] Teiki Benveniste: Well, I mean, we're getting tag team on this with Sam, but I'll start I think the, the, the, there's been a few themes [00:14:00] coming into market. So, things like on the riskier end of town, some triple C liquid credits coming to the market for refinancing and finding that.

[00:14:11] Teiki Benveniste: The liquid markets weren't necessarily open for them and then going down, having to go down the route of, of private debt. But that's also true for the bigger end of town and larger corporates that aren't performing where syndicated loan markets last year weren't necessarily open for them either where historically they would have been able to access that cheaper source of funding while they had to turn to private lenders.

[00:14:35] Teiki Benveniste: They had to turn to people like. And a few others that have the size, the scale, the balance sheet, the ability to execute quickly on large tickets in private credit and paying a premium over what they would normally pay in syndicated loans. Now, I think what you're seeing now is maybe a bit of a reversal of that with syndicated markets reopening.

[00:14:59] Samantha Milner: [00:15:00] Yeah, we've seen some loans in direct lending get refinanced in liquid. And I think the beauty of Ares is that we have this balance sheet at 300 billion USD in credit where we can finance this business, whether it comes to direct lending. Or syndicated loans. And we are, are at that front of that conversation and pricing that risk for our sponsors and for our companies.

[00:15:24] Samantha Milner: And so let's say it does come liquid. We have those relationships and we can lean in and getting better allocations at new issue and in some cases, better economics and most importantly, we're getting better diligence because we're looking at this situation well ahead of when it comes to market. So it is interesting to see these markets converge and you have these markets at the disposal of a company or sponsor to toggle back and forth, depending on where they see the best value.

[00:15:53] Ryan Loehr: Yeah. 

[00:15:53] Samantha Milner: I'm sorry. Best execution. And there's a lot of other things that go into that. 

[00:15:57] Teiki Benveniste: Yeah. I think from putting on [00:16:00] the, the, the lens of the investor, we've talked about the our clients are looking for capital now looking at the investor side. It means that, if you invest with, certain strategies of areas that can go across the spectrum, we're able to play the relative value of where we see the best.

[00:16:17] Teiki Benveniste: Thanks for your back. Between those private assets illiquid and illiquid markets. And that's something that we're, we're quite proud of being able to deliver to, to investors. 

[00:16:28] Ryan Loehr: I guess one follow up question I had for you, Sam is you mentioned, liquid credit as represented by the name more dynamic it can be more actively managed in periods of big dislocation.

[00:16:41] Ryan Loehr: I think you mentioned 2020 when Yeah, prices would, volatility was kind of circa 13%. Do you still have, I guess, the turnover and that, active management in those sort of periods, because I guess, taking the lens of traditional fixed income investors, that are confident on the [00:17:00] underlying company and the ability to repay the loans could, hold that

[00:17:03] Ryan Loehr: effectively through to maturity and get their money back in the coupon. But I guess, if if you're having to rotate out realize potential that potentially the loss if mark to market value is dropped, I mean, how do you kind of make that trade off? 

[00:17:19] Samantha Milner: It's a great question. We traded around a billion dollar USD a week of paper during March of 2020, and it gave us a terrific opportunity to sell some of our assets, whether it's yield to call paper or maybe some single B or riskier assets and buy higher quality assets at similar prices.

[00:17:39] Samantha Milner: Because it was the retail funds that were selling what they could, not what they wanted to, what they could. And those tend to be higher quality. So we went up in quality without taking that much risk and without giving up that much principle. And then when the fed came in and you saw, you saw high yield really recover.

[00:17:55] Samantha Milner: First, we started selling those assets and buying a little more structured credit, which [00:18:00] lacked. And then as we got more conviction on the reopening trade, We started going more down the risk spectrum, buying more airlines, restaurants, et cetera. So the markets were very liquid. They were very efficient. And so we were able to capitalize on the volatility and make really good trades.

[00:18:16] Ryan Loehr: Teiki question for you. Something that's quite topical at the moment and it seems sentiment around it is shifting is the interest rate outlook. And you look at kind of markets, at least in the U. S. November, December last year, investors were cutting pricing up to, I think, 5 or 6 rate cuts. That's now dropped back to what I believe is 3.

[00:18:38] Ryan Loehr: But if we are approaching the end of. This kind of higher inflation environment, this high rate environment and the next logical move by the Fed and other central banks cuts, how does that impact? Floating rate private loans and, kind of what mechanisms does Ares have at its disposal to still offer investors, quite a [00:19:00] meaningful return premium if we see, you know, rates cut.

[00:19:03] Teiki Benveniste: I think that's again, a very topical question. I'm going to just take a step back here first, because if you, if you look at the track record of areas in direct lending self originated loans, what you can see is that since 2004 in the U S, Since 2007 in Europe, we've been able to generate a consistent yield premium over liquid credit markets.

[00:19:27] Teiki Benveniste: So the reason why people tend to come to us in direct lending is for that yield premium, which really Doesn't go away with rates coming down. If your base rate comes down, cash rates come coming down, the premium is still in place. So that's really what you're getting paid for doing direct lending. It's that yield premium.

[00:19:52] Teiki Benveniste: Now of course it impacts your absolute return and you would have a lower total return if you saw [00:20:00] significant rate cuts because your coupon gets cut. The other part of the equation is Also the. In direct lending, you're getting origination fees, especially if you are self originating and you're the sole lender.

[00:20:12] Teiki Benveniste: And that does not get impacted by interest rates. So it's another source of income. And, it can range from anything between 2 to 3 percent upfront. For loans that tend to refinance after three years. So that's an extra 1% per annum for investors. And all these things are not interest rate dependent.

[00:20:31] Teiki Benveniste: Mm-Hmm. , they're part of the the, the reward for investing in maybe a less liquid asset class and, and doing it with a manager that can be the sole lender, the originators of, of those of those assets. 

[00:20:43] Samantha Milner: Now, it depends why rates are being cut, but let's not forget that it will help the borrowers in terms of interest coverage.

[00:20:50] Ryan Loehr: Yeah, because I think that's probably the next question. I mean, let's take the opposing view. If rates stay, higher for longer particularly in private loans, private [00:21:00] debt something quite topical is, well, who's paying these, 10, 11, 12 percent rates and surely, there's a an alternative these short term, kind of bridging type arrangements where it's just to see them through until conditions change, in which case, I guess what becomes topical both default and loss rates, which, I know Ares has an exceptional

[00:21:21] Ryan Loehr: track record with wouldn't mind touching on that before moving back to liquid credit. 

[00:21:26] Teiki Benveniste: What you're seeing in that space and you have to go back to what types of corporates are we financing? And generally speaking, you're talking about A part of the market where it's sponsored, private equity sponsored back where these are corporates that are in a growth phase, right?

[00:21:49] Teiki Benveniste: So you're expecting to see growth in their ABTR year over year. And that's, that's quite an important point because. Interest rates go [00:22:00] up. Yes, but you also see appreciation on the EBITDA side. So that's the first thing is that your income or the cash generation from those corporates is not set at a certain level and stays there.

[00:22:15] Teiki Benveniste: The expectation is that it goes up and that's why you're lending. It's your lending for that growth. So that, that would be the first thing. Now, if you look at interest cover ratios, they have come down across the industry for floating rate corporates that fund themselves with through floating rates.

[00:22:33] Teiki Benveniste: But that also means that then credit selection becomes even more important. Because yes, you will have corporates that will struggle and others that will do better. So how do we differentiate in that space? We do only a fraction of the credit that we see. And I'm, we're talking about single digit kind of CLOsing rates.

[00:22:55] Teiki Benveniste: So we are very selective. We don't do certain sectors that are cyclicals. [00:23:00] We are looking at corporates where we can clearly see a management The team that's been together for a while has gone through cycles has been able to execute on a growth plan. All these things that we're looking for means that our book of Leonard is generally more defensive and more able to grow to go through or.

[00:23:20] Teiki Benveniste: Hiking cycle and, and face higher rate environments. 

[00:23:24] Ryan Loehr: And you mentioned, so, key aspect is these are growing companies, particularly in, the LBO type space or private equity sponsored backed space. I mean, in an environment where. Inflation has been running, hot.

[00:23:39] Ryan Loehr: You look at input costs for companies, be it, labor or material delays from port congestion or conflict. Does that not become more uncertain? And, if you're lending to these companies or against these companies with, greater uncertainty. I mean, how do you protect against [00:24:00] that?

[00:24:00] Ryan Loehr: And I guess there's a follow on question to that. Do you exclude certain industries that are, more cyclical than others? Is that part of the process? I mean, clearly, growth is great. When you can see year on year historical growth rate, but it's not guaranteed. Going forward.

[00:24:17] Ryan Loehr: So if you're dependent on that, what controls do you have in place? 

[00:24:21] Teiki Benveniste: Yeah. And you're absolutely right. There's certain industries that you just don't feel are made for direct cleaning as far as we're concerned. Yeah. It's a liquid. You cannot trade out of a position. So if you're in a cyclical business and you see the cycle kind of, starts to turn and you can't trade, then you're, you're stuck with it.

[00:24:43] Teiki Benveniste: So there are certain sectors, which we will avoid because there are two cyclical. I think from the point of view of having seen cost increases in, in certain businesses or across all businesses, really. The important thing for us is to back corporates that have the [00:25:00] pricing power to pass on those higher costs to the end client.

[00:25:05] Teiki Benveniste: So they have that, that pricing power, which in turn protects their margins. And when you think about what we're doing, it's really about cashflow lending. So we want to see. Or lend to corporates that are able to protect those cash flows. And when you have a cost base that increases that those companies are able to pass on those higher costs to protect their margins.

[00:25:28] Ryan Loehr: And I guess contrasting that with liquid credit, I mean, something that I've found quite interesting and topical is, various or other advice groups that we, speak with and kind of sentiment around, liquid credit, say high yield, for example, is that. The spread is quite narrow.

[00:25:46] Ryan Loehr: It's not, large enough to be attractive, but, I think it's more nuanced than that because over the past five years, 10 years. Certainly the quality of the high yield universe is much greater as much higher [00:26:00] than it's previously been. So I guess why you've got, on one hand questions or investors have questions around, the private credit space, which, has offered, attractive yield still offers really, that premium that you mentioned, Teiki on the liquid side investors, perhaps under appreciating that change in quality.

[00:26:18] Ryan Loehr: Things like, fallen stars, perhaps the high yield market that have dropped from investment grade to high yield. What are you seeing in that space? Sam. 

[00:26:27] Samantha Milner: Yeah, no, we, listen. High yield spreads are tight. And so I'm not sure when this will be broadcast, but call it either 1st percentile or 5th percentile.

[00:26:35] Samantha Milner: But you're absolutely right. That's post global financial crisis and the index has gotten much higher quality. We've had a lot of washout, whether it's from energy. It's gotten to be a much higher quality index. So from an apples to apples perspective, that percentile should be adjusted higher. That being said, they are tight, but what's good about high yield is you are getting that discount.

[00:26:55] Samantha Milner: And so even without assuming rates drop, you have that [00:27:00] optionality when you're buying a bond at 88 cents on the dollar, 95 cents on the dollar, there's some catalysts where there's a pool to par in the near term, right? Whether that's M and a as one example now we are still overweighting floating rate in our multi asset offering.

[00:27:15] Samantha Milner: So we are overweight loans and CLO debt and equity, and we are underweight high yield today, given what we just said with spreads, but it still plays a great role in a multi asset offering because you are having that optionality when you think about, when you think about price. 

[00:27:30] Ryan Loehr: Yeah, it makes sense. And in terms of, just going back to, I guess, default rates from what I could see across.

[00:27:37] Ryan Loehr: The whole spectrum of Ares investment universe. I mean, compared to kind of market default and lost rates, Harry sits at, a third and in some cases, a 10th of what the market's doing. So clearly, downside protection that lost mitigation is key. I mean, what do you both attribute that to?

[00:27:54] Ryan Loehr: Clearly, selecting the right underlying companies, but there's got to be [00:28:00] a lot more to it than than just the selection process. What happens when you, you do have a default workouts, et cetera. 

[00:28:06] Samantha Milner: I think it starts with our team on the liquid credit side. We have 26 reach research analysts looking up and down the capital structure.

[00:28:14] Samantha Milner: They're very senior in terms of covering their sectors through many different cycles, very strong management relationships. So that downside protection, they're able to trade around their book in terms of relative value and see on the horizon, what's coming in terms of. Pulling the trigger into recommending a credit sale.

[00:28:34] Samantha Milner: Now, what we also have the benefit of is the power of the platform in terms of getting differentiated information where on the liquid credit side, we get financials every three months in direct lending, a big percentage of those companies, we get monthly financials. So we're seeing trends ahead of the liquid credit market.

[00:28:54] Samantha Milner: Whether it's related to inflation whether it's related to what the consumer's doing, how businesses are [00:29:00] spending, what's happening with margins, what's happening across these different sectors, and that gives our liquid credit analyst even more data in terms of informing their decision of how to look at, their companies and evaluate.

[00:29:13] Samantha Milner: And I think not only I am impressed patting ourselves on the back here of our lower default rates. But what I think is even more important is getting better outcomes. When you look at recoveries, they are at record lows, and you need to be a scaled manager. You have to be in the room, whether it's on a super steer co or otherwise, in terms of driving the restructuring and driving better outcomes for you and your constituents, because there are different outcomes for the same lender class.

[00:29:40] Samantha Milner: And so I think it's really critical to be with. A skilled manager to make sure you're, you're part of that 

[00:29:45] Samantha Milner: process. 

[00:29:46] Teiki Benveniste: I think that's super important. The scale is a big part of it. But you also mentioned that, that ability from the get go to, to get that, that superior credit selection. I think that's, that's absolutely paramount.

[00:29:58] Teiki Benveniste: Again, Gaining [00:30:00] differentiated insights by talking to various parts of the platform, not just, people in direct lending, but, people in direct lending talking to people in liquid credit, talking to people on the private equity side and so on. And, and basically sharing that information across the ecosystem of Ares.

[00:30:14] Teiki Benveniste: To get that differentiated inside that edge over the market you, you might be lending to some other parts of of the, of a certain part of an industry and getting information via the liquid trade group for that, that industry that you will feed into direct lending and vice versa.

[00:30:32] Teiki Benveniste: And that, that makes us better investors. 

[00:30:34] Ryan Loehr: I just want to check I didn't misshear this. You said on the direct lending side. You're getting monthly information and that feeds back, obviously, the, the data that's available on the liquid side. I mean, for a lot of. People, you assume that you're getting access to information on the liquid side before you're getting, that, that, that's quite an interesting dynamic, right?

[00:30:56] Samantha Milner: I'm so glad you just said that because I want to be super clear. We're not [00:31:00] getting private information. So our compliance team, well, thank you. We're getting trend level. So we're not getting the names of companies. So in 2021, we were getting a lot of information about labor inflation in the healthcare provider space.

[00:31:13] Samantha Milner: So it's more on a trend level than it is on an actual name. But I also think when you look at direct lending, a lot of those middle market companies. We say they graduate, I'm using quotations into the syndicated loan market whether it's through acquisitions or organic growth. And so when that company comes to market for the first time, a lot of times the, our competitors will have caught three or five days diligence, this new business.

[00:31:38] Samantha Milner: But we have that incumbency. We have, two decades worth of information from that credit. So we're able to have that access to the management team and we're able to have more history. And so that also gives us in terms of differentiated information on the new issue side. 

[00:31:53] Ryan Loehr: Yeah, that's that's really interesting.

[00:31:55] Ryan Loehr: I mean, I never kind of, thought that about, obviously platform like areas, with the [00:32:00] private loan trend level information, feeding back on the liquid side. You just, I think even as an advisor, you assume, private markets and more opaque, they're slower to provide information through the borrowers.

[00:32:11] Ryan Loehr: And that feeds back. And, there's potentially a reason why you do get that return premium, because of that illiquidity and because of, the, the, the less visibility, visibility, more opaqueness. So interestingly here that, obviously that, that actually feeds through and supports decision making on the liquid side. Learned something new.

[00:32:27] Ryan Loehr: So thank you. 

[00:32:28] Samantha Milner: And I think it's, I think it's awesome. I've been at Ares for 20 years. And so when you look at large managers. You think, okay, they're very, they're very siloed and areas has a special culture where we're very collaborative, and it's very important for us to share information. And we're at the same level of collaboration.

[00:32:45] Samantha Milner: We were today. Then we're 20 years ago, and we were 5 billion under management. And I think that that sets us apart from 

[00:32:51] Samantha Milner: many of our peers. 

[00:32:52] Ryan Loehr: Yeah, and I guess in terms of touching on misconceptions, which I think there's lots of misconceptions, both on the private [00:33:00] or the direct side. Yeah. As well as, the liquid side and, for our investors who, more sophisticated that are wholesale there's still, a lot of questions around, whether it be private equity, private debt because it is a new asset class that really, access has only been, democratize or, been made more available to these types of investors in the last, two, three years.

[00:33:21] Ryan Loehr: So there's still, you're trying to work out, well, you're getting these high rates. What are the risks? What don't I know? So I guess Teiki, what, what are the misconceptions when it comes to predominantly, um, direct loans, private loans? 

[00:33:34] Teiki Benveniste: Yeah. I mean, often what you see is there's It's a theme that fares up in, in the market, in financial press, and then people will think of private debt is just triple C issuers kicking the can down the road.

[00:33:47] Teiki Benveniste: So it's the lower quality part of the market. Well it's one part of the private market. I mean, Sam just mentioned the companies that graduate. from direct lending to syndicated loans. [00:34:00] So I think, to put things into perspective, if you think about direct lending companies, they're effectively companies that are generally acquired by private equity sponsors.

[00:34:12] Teiki Benveniste: And those private equity sponsors need some capital, some debt capital to fund this, this acquisition. And what you will see is that you will have a very wide range of Credit quality of corporates in the private private, private direct lending, but also you will have a core of corporates that are, let's call it middle market corporates that have in the U S between 50 to 75 million.

[00:34:39] Teiki Benveniste: Those of the sweet spot of that market that Basically cannot access syndicated loans because they're not big enough, but they're not small. 50 to 75 million of EBITDA is not small, and therefore they need that private capital. They need that direct lender to step in and [00:35:00] provide that capital. And then as they grow, And they reach, a hundred million dollars or maybe they are or above, then yes, they graduate and they become eligible to access capital via the syndication.

[00:35:12] Teiki Benveniste: So it's a way to demystify. It's the same corporate that has grown, that now has access to that market because they are larger. 

[00:35:22] Ryan Loehr: Would, I guess on that, once upon a time, would those same companies have turned to, a major, bank, and if so, is it regulation that's kind of a cause for, for, major banks to pull away from, direct lending, those types of loans, LBO loans or is it, something else?

[00:35:39] Ryan Loehr: What, what's kind of been the driver of that? 

[00:35:41] Teiki Benveniste: It's been a combination. You've seen a concentration on the banking sector. So some of those loans would have been done by regional banks historically in the U S there has been like this long trend of regional banks concentration into larger banks.

[00:35:55] Teiki Benveniste: I mean, recent trends, SBB and so on have just seen that that trend [00:36:00] accelerate. And you're absolutely right. The regulation has changed and it has made it. very difficult for those banks to hold those types of loans on their balance sheet because of capital requirements. And, going back to where I come from as a, as a loan trader, I actually went from, trading prop to helping sell down the balance sheet of the bank that I was working for, because we went from Origination, hold the credit on your balance sheet model to originate the distribute model.

[00:36:29] Teiki Benveniste: And so it doesn't mean that the banks are not involved anymore in the larger end of town. We work hand in hand with the banks it's just that the risk then gets sold down to people like us. And just going back on, the difference between private illiquid and syndicated loans Where does the liquidity come from?

[00:36:50] Teiki Benveniste: It comes from the syndications. It comes from the fact that this loan is held by hundreds of investors. And therefore there's a secondary market [00:37:00] of people trading between each other. Direct loans. Often in the way Ares does it where we're the sole lender because we're the sole lender, there is no active secondary market.

[00:37:10] Teiki Benveniste: Yeah. So the liquidity comes from that broad syndication. 

[00:37:14] Ryan Loehr: Yeah. And in terms of just briefly touching on that. So I mean, average duration for, I guess on the private direct loan side of the moment, what does that look like? 

[00:37:22] Teiki Benveniste: So average duration? 

[00:37:24] Ryan Loehr: Yeah. 

[00:37:24] Teiki Benveniste: Direct loans are like syndicated loans, mostly floating rates.

[00:37:28] Teiki Benveniste: Yeah. So your interest rate duration is going to be. Very CLOse to zero. I think it's 0. 3 years is the interest rate duration because your coupon resets roughly every three, three to six months. So any moving interest rates just gets reflected in the coupon. So it's, it's a naturally low interest rate duration instrument through that, that floating rate competence.

[00:37:52] Ryan Loehr: And I guess moving to the liquid side, I mean, what are the misconceptions that you commonly see? 

[00:37:59] Samantha Milner: So, yeah, I guess [00:38:00] CLOs is a good one because there's this misconception that CLOs have marked market leverage, and if a certain percent of the market gets downgraded to triple C, they're forced sellers. And that's, that's not what happened.

[00:38:14] Samantha Milner: This is locked up leverage, and there's a mechanism in place if there are tests that are being tripped, you just repay the leverage instead of distributing the cash flows to the equity. And so it's very stable. So when you think about. Loans as an asset class, CLOs represent a majority of the investor demand.

[00:38:34] Samantha Milner: And so that provides stability for loans along with, clearly the floating rate. So I think that is one big misconception. And that relates to that spills over into both loans as well as the CLO headlines, that three letter dirty word. Right. So that certainly is a misconception. I think with the growth of any.

[00:38:52] Samantha Milner: Asset there's always tends to be technology. That's the next, telecom from, early to early 2000s. But [00:39:00] we're not financing venture backed technology. We're talking about enterprise software, sticky cash flows. And so I would 100 percent rather finance. A software business, which is the last thing a business will turn off.

[00:39:16] Samantha Milner: Then a cyclical chemical business that, yeah, sure. It's levered three times, but it's worth four. So if you're getting the same spread between those two businesses, that's an, that's an easy decision to make. Now it only happens as you get a premium, right. For cyclicals. So you make that decision. So I think those are probably the two biggest misconceptions, but I don't, I know we don't have tons of time, 

[00:39:37] Samantha Milner: but there's plenty more. 

[00:39:38] Teiki Benveniste: I think, think on the CLO side.

[00:39:39] Teiki Benveniste: For me, it's every time I say CLO think people hear CDOs and they, they think it's like the, the 2008 subprime backed structured products. But it's a very different animal. And if you looked at the, the default rates, yeah. Over time, I think if you can look at Moody's. You would find that, investment grade CLOs never actually blew up.

[00:39:59] Teiki Benveniste: I think the [00:40:00] worst 12 months default rate was 30 basis points or something around that. So, that creates an opportunity because there is a lot of current yield premium in CLO debt versus similarly rated corporate bonds. And for us, it's a, it's a great source of, of current yield, higher current yield with investment grade, quality credit, and in a liquid format that you can actually trade.

[00:40:21] Ryan Loehr: Yeah, I think yeah, on the, just the CLO acronym, when people hear that, it's almost like flashbacks to that, that movie where Ryan Gosling sitting in the room with the whatever that game is with the pieces on top of each other. And he's playing it. Plucking out the different pieces and it all falls down.

[00:40:37] Ryan Loehr: And I think that's just, post GFC people hear these acronyms get confused, don't know what they are associated with the GFC and think, well, I don't want to touch it. It's, market. I don't understand. But in reality, it's not. Like there's a lot more to it. 

[00:40:50] Samantha Milner: And you can look at the transparency.

[00:40:52] Samantha Milner: Let's not forget. This is a pool of loans where you can look through and see every single name versus the mortgage [00:41:00] crisis was completely different. Right. You didn't know what you were buying. So the transparency level is it's apples and oranges. 

[00:41:06] Teiki Benveniste: And we use that to our advantage being a significant loan investor.

[00:41:10] Teiki Benveniste: We can effectively re underwrite. Those loans, there are like 200 between 200 and 300, 300 loans that back those structures and we can use our credit selection and credit assessment to look at those pools and really differentiate the risk between the CLOs out there based on what they're holding. 

[00:41:31] Ryan Loehr: Yeah. Yeah. If you get a crystal ball out could kind of, pick the future or the, the environment for each asset class for, for, for private direct lines, for liquid credit. I mean, what would be the most favorable market for each of what conditions need to eventuate? We say, this is absolutely perfect.

[00:41:47] Ryan Loehr: Or is it more kind of all weather? 

[00:41:50] Samantha Milner: Well, for credit, you don't need a lot of growth, right? It's in the way that we underwrite. We're not looking, we're just looking for stability of cash flows, right? So, we're stress testing, et cetera. Yeah. So [00:42:00] for Ares we do look to outperform through every cycle, right?

[00:42:04] Samantha Milner: Up and down. But where we really shine is when there's credit dispersion. So take a year like 2019, there were around 120 loans that dropped 10 points or more. And we were in five of those loans. And so in that year we outperformed by call it 250 basis points. It's like more than 10%. So those are the markets that we will shine even brighter.

[00:42:27] Samantha Milner: Right. I don't want to outperform in a huge risk on 2009 market. That means I'm really, taking on a lot of risk, but I would say in most cycles, we look to outperform the market. 

[00:42:37] Teiki Benveniste: Yeah. I think that credit DNA shines exactly in those sorts of environment where picking the right credit, avoiding the falling knives.

[00:42:47] Teiki Benveniste: That, that, that type of environment is where we're going to shine. It also is the environment where you're going to see opportunities because there's going to be stress. There's going to be some great companies that have been over levered. They have the [00:43:00] wrong structure. And in some of our strategies, we can actually provide a capital.

[00:43:06] Teiki Benveniste: To, restructure those those financial structures of on those corporates and they're, they're good corporates. They're not bad corporates. They're not bad businesses. They have just been put under too much leverage and that creates a great opportunity for us to come in and, and provide, provide capital and outsized return for investors.

[00:43:24] Ryan Loehr: Yep. 

[00:43:25] Samantha Milner: I'm going to steal a phrase that I should have said earlier, and it's winning by not losing, right? It's our avoidance of credits that goes south. That's what, that's where we, we shine. 

[00:43:35] Ryan Loehr: Yeah, I think it's interesting you say that. Howard Marks was in Australia kind of 12, 18 months ago.

[00:43:40] Ryan Loehr: And I remember being lucky enough to be invited in the room and hear him speak and, common phrase is that the best of loans are made in the worst of times and the worst of loans are made in the best of times. And I think, that kind of philosophy where. You're looking for outperformance.

[00:43:52] Ryan Loehr: You're looking to be opportunistic. And I know you guys sit in a very different kind of approach than, Howard and I treat in terms of opportunistic debt, but [00:44:00] yeah, risk adjusted outperformance, not just outperformance by, layering on additional risks. So I think that's hugely important.

[00:44:08] Ryan Loehr: Probably one final point to touch on, cause I know we're quite tight with time, but investors have a question and thinking about, well, where does this fit? Within their portfolios. Clearly, if you've got potential for return of, call it anywhere from 8 to 12%. Maybe, around the increment slightly higher than that.

[00:44:26] Ryan Loehr: That's really in line with long run equity returns across, almost every developed market. So is this potentially something to think about for them to think about as a substitute to their equity allocation and, reduce volatility? Yeah, absolutely. Is this something that can fit within, standard fixed income allocations?

[00:44:44] Ryan Loehr: I mean, how, how should investors be thinking about layering that in and what role should it really be playing? 

[00:44:49] Teiki Benveniste: I think that's a question we get all the time. And obviously depends on each investor risk profile. But when you look at liquid credit, just, just take the example of [00:45:00] liquid credit and over the last 15 years.

[00:45:03] Teiki Benveniste: loans, high yield bonds CLO, investment grade debt. You, you had returns that are in line with growth assets. So. Equities, but you've had about 50 percent of the volatility. So we really think that how you build your portfolio is credit sits in that sweet spot in the middle of your traditional fixed income, which has to be your, really defensive asset class and your growth asset class.

[00:45:29] Teiki Benveniste: So it's, it's almost, and you can take both from the fixed income and the growth side to fund an allocation to credit because it's going to, it's a bit like that mid fielder, it's the number 10 on the field. It's going to be providing you that buffer with the current income. But it's still going to have more volatility historically than, than your traditional fixed income because of spread exposure.

[00:45:53] Teiki Benveniste: So it's, it's in that it's in between right now that buffer, that, that credit income, that, that, that coupon that we're [00:46:00] clipping is extremely attractive. And that's going to be probably most of the, the returns going forward. Yeah. So that's, that's how we anchor. That clipping that coupon, that current income.

[00:46:13] Teiki Benveniste: Now, if you think about a private debt and the illiquidity that comes with it, if you're happy to spend a bit of that illiquidity budget. On assets where, you don't, you don't have daily liquidity then that's probably in an alternative assets allocation more than a traditional fixed income growth logic.

[00:46:35] Teiki Benveniste: And there are a lot of discussions out there about, how much of your total portfolio should be in alts. And you look at different players out there and there, there are certain people that say you should have 50 percent in alts across private equity and private debt. If you can stomach the liquidity, you look at historical returns and it tends to improve the performance of your portfolio, both from a volatility standpoint and a return standpoint.

[00:46:58] Teiki Benveniste: So... 

[00:46:59] Ryan Loehr: And just on the [00:47:00] illiquidity piece, I mean, this isn't private equity where we're talking about, a 10 year plus, 1, 2, 3 year optional extensions. I mean, what, what are, what are kind of the average loan term 

[00:47:09] Ryan Loehr: within the, 

[00:47:10] Teiki Benveniste: yeah, I mean, like it's a, it's a, it's an asset class where on average loans tend to repay after 3 years.

[00:47:16] Ryan Loehr: Yeah. 

[00:47:17] Teiki Benveniste: Their maturity, their contractual maturity is longer. So that three year will extend when, markets are a bit more or less constructive. And it might actually shorten when the market is a bit hotter and there's more refinancing, but on average it's about three years. So there is, there is a, like a return of the capital that, that happens quite often in those asset classes.

[00:47:37] Ryan Loehr: Yeah. Cause I mean, even like discussion and model. Our client base. I mean, if you're talking about growth assets like equities, even though you do have, the optionality of daily liquidity, I mean, you shouldn't really go into that sort of investment if you don't have a horizon of, 5 to 7.

[00:47:50] Ryan Loehr: So, if you're talking about something with, lower as the statistics show, downside volatility, you get most of the return through that coupon and, the loans [00:48:00] are on average rolling over every 3 years or so. I mean, it's quite a compelling case, I think. 

[00:48:05] Samantha Milner: Well, that's why these credit funds that have public and private are even more attractive because you're getting 20 percent liquidity each year, right?

[00:48:11] Samantha Milner: And that's, that's kind of the holy grail. 

[00:48:14] Ryan Loehr: Yeah. Well guys, thanks so much for coming in and particularly Sam who flew in from The U. S. Only this week. I know you've got a lot on for the rest of the week, and hopefully we can dose you out with with caffeine and sugar to keep going. But yeah, thanks so much.

[00:48:31] Ryan Loehr: A lot of key takeaways and really enjoyed the chat. 

[00:48:33] Samantha Milner: Thank you. 

[00:48:34] Teiki Benveniste: Thank you.

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