Beyond the Game: Value Creation in Alternatives

Welcome to the Alts Report, where we explore the value of alternative investments and the trends in the marketplace. Happy to be here in Vail, Colorado at the Morgan Stanley Ares due diligence day with Mike Arogeti, who's the CEO and founder of Ares. Mike, you've had so many different experiences across the landscape, whether it's private credit private equity sports, real estate. Really a privilege for all of us to be able to spend some time talking about all those different market segments and your thoughts on the market in general. Great to be here and thanks for the support. It's amazing to see all the advisors here engaging with us on the value of private market investing. If we talk about the market, Mike, you know, we've seen studies that suggest that, you know, this is a $30 trillion market for individuals by 2030. We've seen lots of adoption in portfolios and generally across the individual market over the last several years into alternatives. Can you give us a sense of what you think's driving that market and, and why we're seeing that shift? Probably think about it through two lenses. One is access. We talk about access, it's really about what is the investible market opportunity that's available to institution and institutional and wealth clients. And it's, it's interesting because private markets have been taking market share from the public markets pretty consistently for the last 30 years. And I think that's a function of the evolution of the capital available to support growth in the private markets and some of the structural constraints that exist in the public markets in terms of a lack of flexibility in structure or a lack of accommodation for smaller companies and, and issuers and borrowers that have pushed people into the private market, but they've had a really positive experience there. And the market has figured out how to keep them private longer. You could see that just in the shrinking number of public companies over time. You can see it in the increase in concentration of market cap in the public companies. And the public markets over time in the traded credit markets, you could see it in the average issuer size and the expansion of those markets to accommodate only the largest. So there's been this big secular trend to growth in privates. Mm-hmm. But when I talk about access, the challenge has always been the individual investor has not had the benefit of accessing those asset opportunities. For years it was the purview just of the large institutional. And, and do you feel like it's the opportunity for return and performance and diversification, they've always been there, but maybe the structures that would allow individuals to engage haven't actually been set up yet and that's one of the big changes? Yeah, so I think it's structure, education, both for the individual investor and the advisor, and technology. And I think those three things have kind of converged at the same time to promote better access. And I think now with the products that we have, whether it's monthly or quarterly liquidity, while we still recommend that folks don't view these as traded - Having a path to liquidity to the extent you need it for personal reasons or for portfolio reconstruction, I think was a real value unlock. Sure. From a structural standpoint. So, shifting, if you're drilling down a little bit more, we're in a little bit different world, right? Rates have normalized, we're not at zero rates anymore, and obviously real estate sensitive to that. We've also had COVID and we had office vacancies and we've had big building and multifamily. There's a lot of things going on. Like how do you, you look at real estate today from an opportunity perspective and, and what are your thoughts? I think you have to always think about the real estate market between secular trends and cyclical trends. Cyclically the entry point for real estate is very well set up. You've had an under build in the major food groups of multifamily and industrial, so we're coming into the current environment with an undersupply. You've seen a drawdown in real estate values generally across the board, putting office to the side down 18 to 20%. So you've kind of bottomed out. And now we're getting into a constructive rate environment, which over time will get us to a constructive cap rate environment. And you should see transaction activity pick up cyclically. Generally speaking, when we see that bottoming, and we've seen it in past cycles, you tend to pick up 400 basis points or so of incremental return on the index. So being, being thoughtful about your entry point in real estate is, is a way to drive out performance. But what's also happening is you're having major secular

tailwinds in the real asset market where global supply chains are reorganizing of shoring, -people start building things different places. Reshoring, nearshoring, friendshoring people are building redundancies, and that's creating a lot of demand for industrial real estate. You're seeing increased e-commerce penetration that's creating a secular demand for warehouses. You're seeing the proliferation of digital infra and data centers off of the industrial backbone. You have an aging population that is changing the way that they live. Um, you've got people who are now dealing with affordability in the housing market that are looking at the rental market as a viable alternative. So you, you have also a lot of really interesting secular tailwinds that are promoting demand in the real estate market at a time when the cyclical uptick feels like it's well- So that all makes a lot of sense. So maybe if we pivot to just another asset class and some of the same things going on in real estate, we've talked a lot about with sports in the past and the opportunities in sports, and I think the thing that most of us know the most about is buying a team, and owning the equity of a team. Do you feel like there's more to the sports kind of ecosystem than simply just owning a franchise? Is there other stuff going on that investors can, you know, gain return from and, and how do you think about that landscape? We were very intentional about the way that we set up our sports practice, which was to call it sports, media and entertainment. There's a lot that happens around teams and leagues from an asset and, investment opportunity perspective, that could probably take a $3 trillion teams and leagues market and five X it. So things like sports equipment and sports gear, ticketing platforms, in stadium hospitality, around stadium real estate developments. In stadium, out of stadium, -- everything outside of the game -- Advertising youth sports is a pipeline to professional sports. College sports is now investible, talent agencies, so, so on and so forth. So yes, the, the teams in the leagues are kind of at the center of the value creation because those are the ones that create the sticky customer base. They're brand and the IP. And they're the ones that drive the increasing value in the unscripted content that pulls everybody up with them. But if all you do is focus on equity investments in teams, you're missing this entire world of, of investment that opens up to you. What is it about this market that there's so much growth behind it when we don't really have that many different teams than we had 30, 40 years ago? The underpinning of growth is media rights. That, that is general, at least in the major sports leagues, that is ultimately what is going to drive valuation back to media and entertainment. There's been a transformational shift in the media landscape from wired cable to over the top and streaming that's changing the way people are consuming content and the way that people are valuing content. But if you look at the length of the media, deals are getting signed by global sports leagues and the value, the underpinnings are there to support continued valuation increase just on what we see today. And I actually look at spending patterns and the consumer is actually shifting spending to experiences. - Experiences versus things Right. And that's sports and that's concerts and that's live events. And so there's something happening there too that's detached from media, that's just behavioral that I think is, you know, fueling some of this. And then look in sports and, and it's funny 'cause in sports you have people who are anxious about 10 to 15% compound annual growth. There's scarcity value, right? There's just a limited number. To your point, they don't trade very often. They are, in some cases, stores of value, right? Detached from the growth in revenue that comes from media. They're stores of value the same way that you have gold, silver crypto, where people view it as a store, value that. So there's something that's happening in team valuations over time too, which is just the scarcity and quality of that asset is also, you know, highly differentiated. Mike, thanks for joining us for, for the Alts Report. Great fun, thanks for having me. Great fun. Really enjoyed having you. I think we all learned a lot. Um, and if, if folks want more information, they can go to morgan stanley. com/alts or they can reach out to their financial advisor. And certainly lots of different opportunities for education, as you mentioned. For sure, thanks for the support.