Ares Management Corporation (ARES) Earnings Call Transcript & Summary

All right. Hello, everyone. Thanks so much for joining us for our new session. For anybody who's just walking in now, I'm Ben Budish. I'm Barclays' analyst covering the U.S. brokers, asset managers and exchanges. I'm delighted to have with us right Michael Arougheti, CEO of Ares. So Michael, welcome. Thanks for being here.

Thanks, Ben. Appreciate it.

Let's start with the macro question. Can you talk about how the firm is positioned for a higher inflation environment? I think we all saw the CPI prints this morning. What sort of challenges and opportunities do you see in terms of deployment, fundraising, realizations? How should investors kind of think through all these factors?

Sure. There's a lot because we have a pretty diversified global business, but maybe we'll talk about inflation and rates. So just a quick zoom out. Ares, a global alternative asset manager, $335 billion of AUM, strong market-leading franchises in private credit, private equity and real assets. And depending on which business we're talking about, the impact of inflation and rates will be slightly different. But I'd say, generally, rising rates is good for Ares. And the reason being, if you look at our credit portfolios of our over $200 billion of credit, the majority is private credit loans to institutionally backed companies, institutionally backed real assets. And those loans tend to be short duration and floating rate. They tend to sit high up the capital structure. And so even when we're dealing with the challenges from inflation, those challenges tend not to overwhelm the opportunity that exists just from base rate increases and spread widening. So as an example of what the embedded opportunity is in the private credit part of our business, we have a publicly traded BDC, Ares Capital Corporation, largely invested in floating rate loans. If you look at the core earnings in that company, and the same would be true for our publicly traded mortgage REIT, ACRE, those companies talked about the value going forward from rising rates. And basically, on the Q2 earnings call said that, as of June 30, to the extent that we saw an incremental 100 basis points of rate increase, that would translate to roughly a 17% increase in core operating income just from the rising rates. So we're already there, right? And now we have the prospect of further rate hikes on the horizon. That's a pretty nice place to be when you're dealing with a floating rate book. Earnings are going up dramatically quarter-over-quarter. The offset to that is, whenever the market is transitioning the way that it is now, transaction volumes can slow a little bit, but we also get repaid less than we typically would. So there's a healthy amount of balance in there. In terms of inflation, if you look at the positioning of the private credit assets, generally high margin, high free cash flow, high return on invested capital. Until the last reported information, we've actually seen them able to deal with inflationary pressures quite nicely and, generally speaking, are positioned somewhere between 2.5 to 3x cash flow to debt service. So there's a fair amount of buffer that even with rising rates and potential deceleration in earnings growth, quite a long ways away, at least relative to what we've seen in past cycles before we see stress emerge in the portfolio from the confluence of inflation in rates. And then the real asset side of the business, maybe stating the obvious, is inherently inflation-hedged. So the place where I think the industry is most challenged is in what I would call regular way private equity businesses where the increased cost of borrow, the devaluation from rising rates and the potential impact economically from inflation could be challenging. I think we're fortunate that's a pretty small part of our business.

Great. Maybe kind of continue with the macro theme. I think the top question from investors tends to be, I see rising rates, I see lower valuations, how is this going to impact fundraising, deployment, realizations? And so being more credit-focused, you have impact from a more challenging realization environment than peers. So maybe can you touch on those 3 topics and kind of what you're seeing?

Yes. It's -- I think we've been fortunate this year-to-date that we are not seeing any impact show through in our fundraising. And maybe somewhat counterintuitively, we tend to see flows increase when markets get volatile. So if you were to look at the history of the firm, the periods of our fastest growth in all of our financial metrics were through the GFC and through COVID. Part of that is because of the DNA of the firm as a distressed investor, but part of it is the value of some of these private -- we've been a big beneficiary just generally of the secular trend in alts. We manage a significant number of strategies globally. We could have anywhere from 20 to 25 funds in the market at any point in time, which derisks both to the upside and the downside, candidly, the impact from fundraising. But what's interesting year-to-date, we've raised about $30 billion year-to-date, which is a very healthy clip, but we've done it without any, what I would call, flagship funds, which are the largest funds within any of our core strategies. And that's really a function of enhanced retail distribution, the diversification of the fund strategies and just generally the way that our investors are increasing their wallet share with us. So while year-to-year, you may see some volatility, the floor in any given year in our fundraising is actually going up.

And what about on the deployment side? Are you seeing perhaps in credit it's a little bit less relevant, but I think investors look at -- again, public valuations are a little bit lower. On the private market side, do I wait to accept a better valuation? Meanwhile, you and your peers are looking at more interesting opportunities. What are you kind of seeing there? And how do you think that plays out in the near term?

It's -- deployment, I think, was surprisingly strong to many last quarter. So we deployed -- last quarter, our deployment pace year-to-date is actually on track with where we were in 2021, which by all accounts was a record deployment year across most fault strategies. Interesting, because typically, what we'll see in the private markets when the markets are transitioning and valuations are unclear, transaction volume is slow. So we've all seen the M&A numbers, M&A transaction volume -- that gets reflected in our primary market opportunity. But when that happens, as I mentioned earlier, we're getting refinanced less so that the AUM in place actually is more durable, but then other parts of the platform turn on, things like our distressed and opportunistic credit business. Our liquid credit funds start to get much more active in the secondary market and the competitive dynamic changes. So if you look now, banks are derisking and retrenching. Leveraged loan market is, for all intents and purposes, closed. High-yield market is, for all intents and purposes, closed. So on lower transaction volume, we're probably taking a higher share of the volume that's coming through, which explains why we're still deploying it at rates commensurate with last year, even though volumes are down.

Interesting. Maybe kind of following up there, I think, with this environment, investors want to know this fundraising is going to go up or down or allocation is going to go up and down. Maybe stepping back and kind of zooming out, where do you see broad institutional allocations to alts maybe in general?

Not -- secularly, not -- at this moment...

I think there's understanding that, as you were mentioning, when the banks pulled back, it's sort of an opportunity for folks like you guys to take some share and then that kind of continues. But zooming back over the next 5 to 10 years, where do allocations go? Do they continue to rise? Is there sort of a...

Yes. I'm going to say no. There's no limit. And I think the reason is you have to say why do people focus on alternative assets as an investment solution. And it's evolved over time from high absolute return to high relative return. And what that transition has meant is that any investor that you're talking to, if it's a retail investor, a pension fund, a sovereign wealth fund and insurance company, it's all -- they're all looking at alternative asset space as a place where they can get excess return relative to their liquid market alternative. And because of that mind shift, and there's been some structural shifts to help capital flow behind that mindset, we're now managing alts to have a return offering of 5%, but we're generating 200 basis points relative to what they perceive to be comparable risk. And so what that's meant is allocations across the board are increasing. We've seen pretty uninterrupted double-digit growth in alts over the last 10 years. I think the compound annual growth rate has been about 12%. We've obviously been growing at 2x plus that. And most forecasters will say that they would expect another doubling in investor allocations. Now certain sectors are more allocated than others. Pensions and endowments are already fairly healthy in their allocations. Retail, not so much. So certain sectors are going to grow faster, but I think the trend for the industry should be continued double-digit growth. The larger platforms who have more resources against sales, marketing, IR and investing are capturing a disproportionate share of that wallet -- per year for the next 5 years, folks like Ares are growing 20% to 25%-plus as we continue to consolidate that share.

Great. Maybe digging into credit a little bit. You touched a little bit on sort of some of the structural drivers. How much of your credit business is tied to deal-making activities, LBOs and the like? And you mentioned that higher rates are a good thing. Is there another side to that? Or is it sort of diverse enough that the business kind of -- it sounds like fundraising, there's really no slowdown. There's no slowdown in shortage of opportunity. Could you maybe speak a little bit in more detail?

Yes, absolutely. And one thing to -- I didn't say this earlier, but it's important, when you think about how our investment activity translates to company performance, because of our credit orientation, we actually get paid on deployment, not on commitment. So while fundraising is great, whether we raise $60 billion this year or $30 billion, what's going to drive the growth in our P&L and our dividend is the investment side of the business. And interestingly, if you look at the positioning of the company today, of our $335 billion, $90 billion of it is uninvested, almost $60 billion of it is uninvested and not yet paying fees. So the reason I mentioned that, in some respects, fundraising for us is in terms of its positioning of future growth is really a '23, '24 story. We're really investing in things that we've raised in the last couple of years.

Yes. Well, okay, on the topic of the fundraising. You mentioned that the $30 billion year-to-date is not from any major flagships. But I believe, on the earnings calls, you've indicated there's a flagship cycle kind of coming up. Can you talk about any details you can share there in terms of which fund families are going to be in the market, what the targets might look like, how much you're hoping to raise over what period of time?

Yes, I think we said we have about 5 funds that are coming to market and the prior vintages of those funds were about $25 billion. Those are all what I would -- we call them flagships, but think of those as kind of the core pillar of a strategy. So it would be something like our next vintage of our European private credit fund, The last fund that we raised was $15 billion. So we don't know exactly how large the next fund vintage would be, but our experience has been historically, when we come to market with the next series in a flagship fund, we tend to see 20% to 50%-type growth rates. We have 2 private credit funds in the U.S. coming. We have a flagship private equity fund coming. So there's a lot of what I would call kind of the core offering coming to market in the next 12 months.

Great. In terms of realizations -- and we touched on this a little bit but how do you -- and again, being more credit-focused, not as much of an issue, but how do you see that environment sort of changing? Should investors be expecting that realizations are going to get pushed out? Do you see plenty of opportunities kind of given the current portfolio that you have?

Yes. I think realizations will slow, so less of an issue for someone like us who's balance-sheet-light and not PE-heavy. But any time the market is -- price discovering the way that it is, transaction volumes will slow, which means that realizations will typically slow as well. That's natural. What that means is equity owners of high-quality assets, we'll just have to own those companies longer. That may create increased opportunity for the secondary side of our business, where LPs and GPs will be looking at full allocations in a given fund and try to create some liquidity. It may mean that equity owners are turning inwards to their existing portfolios to try to tease out deal flow. And so you become a little less reliant on the IPO market or the true sale market to sell. So there's a healthy amount of activity, but it's appropriately slow, so I think they would get pushed down. Again, given our credit positioning, and you're probably sensing a theme here, the bulk of our credit funds have, what we call, European style waterfalls, which means that we get all of our carried interest and incentive income at the end of fund life, right? Because we have to return investor capital and a preferred return before we start generating carry versus what the industry calls an American style waterfall where you earn carry as you monetize. So the idea of what kind of a realization environment am I in is much more relevant if you're an American style waterfall because you're only earning promote when you sell an asset. Structurally, these credit funds because they are floating rate credit instruments against fixed rate hurdles, particularly in a rising rate environment as they get to the end of fund life the distributions from promote off the European-style waterfall starts to kick in, and it's pretty consistent. So we've spent some time talking openly at our Investor Day into the market about this embedded engine of profit that we have in these European cell credit funds. So I think realizations will absolutely slow. By definition, they're going to get pushed back into next year. But from the Ares positioning standpoint, that's not going to disrupt the trajectory of these credit funds because as they get to fund life, that promote is just going to come in through coupons.

And for your group of European water cell funds, as you said at the Investor Day, I think you put out some targets in terms of what you expect to realize. Is there any risk there in terms of valuations? I know these are older funds, but presumably invested at lower rates. How should investors be thinking about that? Is there a risk that as we're getting to the end of the fund life, the valuations come down to a level where maybe it's more challenging to hit those targets? Or do you feel confident there?

I think we feel really confident because, again, what happens as they get to end of fund life is they either mature out or they get refinanced, right? So if you think about these funds, you're typically harvesting your European waterfalls in year 6 or year 7 of the fund's life. So we're talking about flagship funds that we were raising in 2016 and 2017. By the time you get to that, you're effectively naturally deleveraging that portfolio is running off.

That's helpful. Maybe in terms of your mix a little bit, obviously, we talked a lot about credit. Can you talk a little bit about perpetual capital? How big is that for you today? And what are the kind of key components of your perpetual capital offering?

Yes. So perpetual capital is an important component of the AUM and the value proposition. It's a little over 25% of our assets and growing. And the growth in that is coming from an increase in our offering. It incorporates things like our nontraded REITs, our interval fund, our BDCs, our mortgage REITs. Those funds are growing in number and growing in size. And I would expect to continue to see that. I think we're seeing more investor appetite or more permanent and more open-ended fund structures than we ever had before.

I want to talk a little bit about retail I think they're somewhat related, but you mentioned secondaries earlier. I wanted to make sure we hit on that. Can you kind of give us an update on Landmark and at a high level? How has that integration gone? And maybe more broadly, like how do you think about industry growth of secondaries in general? How big can that asset class be relative to primary investments?

So it could be quite large. So the secondaries experience is actually quite interesting. The reason we made an acquisition versus building it organically was we saw an inflection point in terms of the market's growth. And that growth was being driven by a couple of different catalysts. One was a general shift from what we call LP-led secondaries to GP-led secondaries. So Landmark, now, Ares secondary Solutions was probably one of the earliest pioneers in the secondary space. But in the early days, the market was really a tool for institutional investors to call their portfolio of illiquid assets. So pension fund XYZ has a new CIO. They want to change the composition. They own a bunch of fund investments that are illiquid they need to reposition. What's emerged over the last 5 years but really is accelerating over the last 2 is a rise of GP-led secondary solutions. So now it's not just LPs looking for liquidity, but it's a GP who's maybe looking to own a great company longer or a institutional equity manager that's going through a generational transfer and needs some mechanism to get capital onto their balance sheet through a financing or a stake sale or a structured financing solution to help facilitate a transition in ownership. It could be similar to what I just said about now, maybe they're at the end of fund life their new fundraising is getting delayed because their existing investors are over allocated to private equity, so they need to extend capital runway. So maybe they take out a NAV loan, which is a loan against those portfolios. So there's an extraordinary amount of innovation happening in secondaries right now that's changing the TAM. But the simplest way and I'm giving you a long answer to a, what was a, simple question. The addressable market for secondaries is the primary market. And so we always think about the secondary market opportunity as a penetration rate of primary capital. And if you think about private equity, private equity secondaries represents about 10% of primary capital. So still underpenetrated, but that's kind of a mature number. Real assets penetration of the primary market is probably in the 1% range. And credit is, for the most part, nonexistent. So there's an opportunity here, too, which was the second growth opportunity, LP to GP, but then also the maturation of the market to take a greater share of the primary market as more people own alts, more people are going to be looking for liquidity solutions. And that's one of the reasons why we're so excited about it. The integration is going great. Cultural integration is as good as we hoped it would be. We've been launching new product, happy with performance, we're really pleased.

All right. So maybe we'll dig into the retail side. And maybe before we talk about Ares specifically again, one of the kind of worries that investors have right now is that the macro looks a little bit unless certain and perhaps retail investors are less likely to allocate incremental dollars. Is that a fear that is valid? Or is the overall penetration of alts into retail portfolio is so low that there's just like a many year runway of upside?

To be honest with you, it's too early to tell, and I think it's going to be manager and product specific. So to maybe just contextualize retail, if to your question about how allocated are folks, when you look at the retail investor and their portfolio that's available for alts, they're probably 4% invested in alts. Most platforms are trying to see that double to be 8% or 10%. Dollar-wise, you're then talking about taking what's roughly $2.5 trillion and turning it to 4 or 5. It's a big pool of capital, which could and should theoretically overwhelm periodic volatility, which is why I think people are so bullish on the secular opportunity to capture incremental retail flows. I think it's important though that people understand the constraint to growth for somebody like us is the capacity to invest, not the capacity to raise capital. So as exciting as it is to be able to diversify our funding sources into the retail channel with new product and permanent capital, if the retail channel wasn't buying that product, the institutional channel would. So for me, it's more about what does it mean from a diversification standpoint, which is good for our business. And from a permanent standpoint as opposed to opening up a new market per se. So it's getting an appropriate amount of excitement, but it may not be quite as transformational as some would think. Historically, having to run ARCC for as long as I did and Ares has -- the retail investor used to be pretty fickle around markets like this. And one of the reasons why we diversified away from a lot of those public market exposures was because the retail investor would typically exit the market when they're supposed to be entering the market and enter the market when they were supposed to be exiting. And so I think the adviser community has viewed some of these less liquid alt products as a way to protect the investor from that type of behavior. So I only mention that because if you asked me that question 10 years ago, I would have told you retail investors will typically run for the doors when we're in markets like this, we're seeing the exact opposite. So we're actually not seeing a slowdown in our retail flows year-to-date, and all this information is publicly available, and we're seeing very low redemptions. So there's something that's changed in the structure of the market and the mindset of the retail investor or the way that they're being advised that's maybe changing that behavior. But again, it's early, but I'm encouraged by what we're seeing.

That's great. Can you give us like just super brief overview of the key kind of products and what makes them appropriate for retail? And maybe any color you could share with on the product pipeline, what helps you may be kind of developing for this channel?

Yes. I think one of the big drivers of alternative appetite retail and institutional is just yield. I think, in the retail market, it's durable yield and income replacement. And so there is a long-term secular trend of just aging population, people living longer, retirements lasting longer and needing to lock in the power of compounding income. So the -- in the early days of the development of this market, the products that are resonating the most are lower-risk, higher-yield, higher-diversified strategies that people can kind of underwrite that compounding effect. So that's non-traded BDCs, diversified credit interval funds, REITs. But there is a shift happening, too, where as people get more comfortable with alts towards income plus, income plus total return. But I think dividend and income is always going to be a key component. But right now, as I mentioned, we have 2 nontraded REITs, a credit interval fund. We have launched a private equity fund leveraging the landmark secondaries capabilities, and we are on file with a nontraded BDC that would have us have 5 kind of core products in the nontraded channel to complement our traded vehicles. And then it is likely that over time we'll build out that suite to touch other parts of our business.

Great. Maybe one last question on the retail side. Can you speak a little bit about sort of the distribution process? What is required from you to kind of help educate advisers or their end clients what that looks like? And what's sort of the...

Yes, it's -- so we have an entity called Ares Wealth Management Solutions, AWMS. It is what you all would think of as a traditional wholesaling and distribution infrastructure, over 110 people whose sole focus is to sell and support product in the channel. That is a big investment that requires a lot of conviction in the ability to actually raise and service the channel, but it is a requirement that if you want to be successful in that part of the market that you need to make that kind of investment. One of the reasons why we're seeing some of the consolidation of wallet that I talked about earlier is because we can make these types of investments, support that type of infrastructure when an up-and-coming manager, frankly, just can't meet the requirement of the resources needed to service product. The bulk of those people right now are domestically focused. And so the next phase of growth for us is to turn our attention to the European and Asian markets, and we've been systematically making hires to build out those teams as well now.

Great. I think I lied. Maybe one more question on retail, if it's okay. Can you -- you're not alone in sort of pushing into retail amongst your peers. And I think the expectation, as you said yourself is that there's so much more kind of TAM to be had and dollars to be allocated. But what are you seeing competitively? I think you guys have been showing some pretty -- there's some quite healthy growth there, but everybody is trying to find their niche or kind of get in more wire houses. So are there -- do you sign exclusivity agreements? Are there -- how do financial advisers think, do I want to sell an Ares fund or a different one? How do you think through all that?

Yes. So there's a lot of sophistication that's entered the channel. And I think the wires and the RIA platforms have restructured and re-resourced to make sure that they can appropriately evaluate and support the product the same way that we have. So part of this growth opportunity was created by folks like Ares making a commitment to the channel, creating products specifically designed and structured for the channel, but also the platforms investing in people, technology to underwrite, distribute and support the product as well. So it's a real joint effort to see this product come online. And importantly, brand name alternative managers are bringing institutional quality product into the retail channel with a commitment to give the retail investor an institutional quality experience, whereas I think prior iterations of growth in this channel has been oftentimes lower quality managers that couldn't access the institutional channel, so they went retail. And it's kind of flipped on its head a little bit. It's competitive, but the market is much larger. So the way we're experiencing it, I would rather be in a market with more competition but significantly more buy-in and available dollars than a less competitive market that wasn't open. And that's generally how we're thinking about it. I think the good news for us is we have been in that channel for almost 20 years, given our listed product. And a key element of how we distribute institutional product is we put it through the high-net-worth and ultra-high-net-worth part of that channel. And so there's a lot of brand recognition and positive experience that already exists for us. Now that we've made the investments that are bringing the product, we're seeing a pretty good uptake.

I promised that was the last retail question. So maybe let's switch over to real estate a little bit. I think at the beginning of our conversation, we talked about, in particular, how the credit side of the business is well positioned. I know you guys have a large part of the portfolio in logistics, multifamily. Can you maybe speak to that? How should we think about stress testing? How sustainable are the kind of returns, rent increases that we've kind of have been seeing over the last year or 2?

It's a similar story, but I don't want to sound cavalier because real estate is a little bit more rate-sensitive. I think the good news is, to your point, we are overallocated to industrial and multifamily real estate and underallocated to office, retail and hospitality. So if you think of the 5 food groups, we're in the 2 best with the best fundamentals. I'd also highlight, at least in the markets where we're operating, generally, those markets are still undersupplied for industrial and multis. And generally, the real estate market is underlevered relative to past cycles. So where we've seen distress in real estate in the -- almost every cycle preceding what this one could be, you've had a combination of oversupply, over leverage and then fiscal policy comes in and the market is disrupted. We don't have that. So what that means is, even though there's anxiety about rates and its impact on value, fundamentals at the property level are as good as people have seen. So you're near full capacity utilization. You're seeing rent and lease growth 20% to 40% period-over-period. And the interesting thing now given the inflation picture, the value of the installed real estate relative to the cost to bring new product into the market and the time to bring new product into the market, given supply chain constraints, is making the in-place real estate more valuable. So we really quite haven't seen this setup before, but one of the ways to get your head around the fact that real estate values are holding is because it's very difficult to bring new product online and the product that's in place is performing extremely well right now.

Got it. Very helpful. The one part of the business we haven't touched on yet, the SSG business acquired a few years ago. Maybe just kind of give us a brief overview and kind of an update how are trends there perhaps different than what you're seeing elsewhere. And how should we thinking through this?

Yes. This is a fun time to be in our business because for the first time in 10 years we're actually seeing dispersion, right? Everything was seemingly correlated. And now Europe is on a different trajectory, different parts of Asia are on different trajectories, that tends to benefit us because we can actually go in and -- there's just more arbitrage available in these markets than there otherwise would be. SSG, just to remind people, we acquired almost 2 years ago, a market leader in private credit, core competency in distressed and special situations investing and a growing business in direct lending and private credit, kind of a marriage made in heaven in the sense that we, being the market leader in private credit in the U.S. and Europe, had the playbook we thought to really expand the business in the region, and we're doing that. So we've raised sequential vintages. We've added more traditional acquisition finance product in Australia, New Zealand. We've added resources around our infrastructure debt platform. We've added resources around our real estate platform. So over time, the expectation would be is that, that broad business that we built will start to expand to replicate what we have in the U.S. and Europe, which is the full product offering across the platform, and we're starting to chip away at that. What's interesting about Asia, if you would have asked me 2 years ago, I would have thought that they would have led coming out of COVID because they were early and there's a fair amount of technical sophistication around medical and medical tech. Obviously, they're having a very difficult time coming out of COVID. China's zero COVID policy is having a meaningful impact on the opportunity set in the region. And so I would say there's more of a special [ sits ] opportunity developing in Asia relative to some other parts of the world that we invest in than I probably would have expected a year or 2 ago. Good news is that's kind of the core business. So I think our folks on the ground there are getting pretty excited about the way those markets are developing.

Great. We've got just a couple of minutes left. I'd be happy to take a question from the audience, if there are any. Otherwise, we can kind of continue.

So my question is just in general in terms of the company, public credit portfolio. How much capacity do [indiscernible] but how much capacity do you have [indiscernible] margins or service company in relation [indiscernible].

Sure. So these will be -- I'll try to give you directionally how I think about the risk. We talked about debt service coverage. They attach typically loan to what I'll call cost because let's assume that value is murky right now. Loan to cost at about 45% to 50%, which means that there's some institutional equity owner that owns the bottom half of the capital structure below us, which is important. They are average EBITDA margins, probably in the 20% range. and they tend to be in high return on free cash flow type industries. So business services, health care services. Interesting thing about credit investing, which I'm sure many of you know, if you go back and look at prior cycles, there are roughly 5 industries that tend to be where the bulk of defaults reside. So as good of a credit manager, I think we are just by avoiding those industries. We tend to avoid a lot of the credit challenges, and that's kind of true. So there's a pretty healthy amount of buffer in those portfolios to withstand increasing rates and the margin degradation, but the most important number I mentioned is loan to cost. Because what's different about this cycle versus prior cycles is assets are less leverage and there's more cash equity subordination. And so if you think about a portfolio generally that's invested at the top half of a capital structure, even if the company is having liquidity issues, the value to the equity owner to support that company and protect that equity is higher than it's ever been. So if I had to predict, if we did go into a scenario where economic conditions worsen dramatically, I think you'll see lower losses given default rates because of the amount of equity in these capital structures and the need to protect. If that doesn't happen, I actually think it would be a very big boom to the private credit market because you basically have a call option on all of that equity, and it doesn't take a lot of capital to unlock it. So we got our first glimpse of this through COVID when companies were having liquidity challenges, significant amount of dry powder came off the sidelines and found its way into the existing portfolios to build that liquidity bridge and dollar deleverage. And I would expect the same thing to happen.

[indiscernible]

So they're all private. So some structures will shadow rate or comparably rate. I'd say generally, when people think about core corporate private credit, you're talking high B, low BB equivalent.

And with that, unfortunately, we're out of time. Thank you so much, Michael.

Appreciate it. Thank you. Thanks for your time, everybody. Appreciate it.