Jul 24, 2023 · 1h 10m · capital-allocators
Kipp deVeer – The World of Private Credit at Ares (EP.329)
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In this episode of Capital Allocators, host Ted Seides interviews Kipp deVeer, Head of Ares Credit Group and CEO of Ares Capital Corporation, exploring the institutional evolution of private debt, underwriting discipline, and credit portfolio management in a higher interest rate environment.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 17.6% of the talking time here. How this is scored →
Ted as informed peer 4.1 Guest teaching 3.8 Guest disagreement 0.3 Ted pushing back 0.2
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 1:00:17 Distinguishing market scope from corporate America
Kipp promptly interrupts Ted's premise that private debt managers replaced the banking system by clarifying they did so for middle-market deals rather than large corporate America.
Hardest push from Ted ▶ 40:08 Pushing on credit pricing trade-offsTed challenges Kipp on how defensive industry positioning conflicts with earning yield when pricing to better companies is more competitive.
Biggest teaching moment ▶ 40:17 Inadequacy of pricing asymmetric riskKipp educates listeners on the asymmetric nature of credit, explaining that charging an extra 300 basis points cannot compensate for flawed underlying credit.
Ted holds their own ▶ 1:00:11 Framing systemic disintermediationTed shows deep sector fluency by framing how private credit managers stepped into systemic banking roles post-GFC, setting up the macro risk discussion.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Introducing Kipp deVeer and Market Reflections | 4 | 3 | 1 | 0 | Ted introduces Kipp and inquires about his contrarian mindset during the late 90s dot-com boom. Kipp elaborates on why he favored downside protection over venture chasing. | |
| The Early Private Debt Markets and Joining Ares | 4 | 5 | 0 | 0 | Ted prompts Kipp on early credit market dynamics. Kipp explains the extreme structural inefficiencies and mezzanine warrant terms of the 1990s and early 2000s. | |
| Ares Platform Overview and Private Credit Adoption | 4 | 4 | 0 | 0 | Ted asks about categorizing modern credit pools. Kipp outlines the historical evolution of LP allocations toward private credit. | |
| Inorganic Growth, Downturn Catalysts, and Firm Culture | 4 | 3 | 0 | 0 | Ted explores catalysts behind Ares' growth. Kipp breaks down how downturns consolidate market share from public to private markets alongside strategic M&A. | |
| Corporate Governance, Scale Advantages, and Sourcing Models | 4 | 4 | 0 | 0 | Ted asks about scale advantages and sourcing structures. Kipp explains why private credit uniquely benefits from scale and dedicated industry coverage overlays. | |
| Sponsor Segment: Ridgeline Investment Management Platform | 4 | 5 | 0 | 0 | Following the mid-roll break, Ted asks about underwriting rigor. Kipp details their open investment committee format and why pricing cannot fix bad credit risk. | |
| Capital Structuring, Unitranche Innovation, and Diversification | 4 | 4 | 0 | 0 | Ted asks about structural tranche preferences and portfolio construction. Kipp describes developing the unitranche product to remove subordinated mezzanine risk. | |
| Market Competition and Navigating High Rates | 5 | 4 | 1 | 1 | Ted probes competitive dynamics with PE peers and high interest rates. Kipp clarifies how equity owners must lead resolutions in over-levered capital structures. | |
| Expansion in Alternative Credit and Global Markets | 4 | 4 | 0 | 0 | Ted asks about asset classes beyond corporate lending and international expansion. Kipp details the trillion-dollar addressable alternative credit space and geographic nuances. | |
| Systemic Risk, Capital Matching, and Workout Liquidity | 5 | 4 | 1 | 1 | Ted asks whether private credit concentration introduces systemic existential risk. Kipp addresses structural leverage matching and why liquidity matters more than covenants. | |
| Ares Growth Vision, Personal Reflections, and Conclusion | 3 | 2 | 0 | 0 | Ted closes with customary personal and reflective questions. Kipp discusses the AUM growth roadmap, team collaboration, and the importance of patience. |
Statements from this episode (25)
25% of 1999 Stanford GSB Class Led Failed Dot-Com Startups
“Because about 25% of my class were CEOs of venture capital-backed, funded startups. Most of them, as I made fun of them leaving the Bay Area, were not gonna be real companies, and most of them weren't, and we were late.”
Early Private Debt Paid 600-700 Bps Over the Risk-Free Rate
“I mean, a senior deal was Three and a half times levered with a six or 700 basis point spread to the risk free rate. Mez deals were 15, 16% fixed rate coupons with seven and a half percent of the company in warrants that struck at zero. He charged five point f…”
Ares Managed $3B in CLOs With Just 65 Employees in 2004
“But at the time when I got there, it was about 65 people. It was LA only. I think we managed probably three billion of CLO money, largely bank loans, but some high yield in there too, because they were all market value CLOs. And Tony and Ben Rosenthal were get…”
Ares Manages Over $360B in AUM With $250B in Credit
“So Aries today is about 2600 people. We have 30 offices. The rough breakdown today is about 700 in New York, 700 in L.A. And about 400 in London. And then the balance are either folks out originating new deals or looking for clients. 360 something billion of A…”
Ares US Direct Lending Netted 12% to 13% Over 20 Years
“Our US direct lending business, I can show someone a hundred plus billion dollar track record over 20 years through market cycles that's generated a net 12 or 13.”
Private Markets Take Share From Public Markets During Economic Downturns
“The privates market overall consolidates share away from the public markets during downturns.”
Higher Interest Rates Will Spark a Shining Moment for Secondaries
“Our view is there's a lot of this private capital that's now stuck. With higher rates that really is going to create liquidity issues for a lot of investors. So this could really be a shining moment for the secondaries business.”
Private Credit Gets Easier to Execute as Firms Grow Larger
“This is one of the few investment businesses, in our opinion, that's actually easier the bigger you get, so long as you continue to invest behind it.”
Multi-Product Platforms Originate Better Deals Than Single-Strategy Credit Funds
“If you're just a Mez fund, you only get calls on Mez deals. If you're just a Unitranche guy, you just get calls on Unitranches, right? So, and by the way, sometimes being in the Unitranche is better risk reward than being in the Mez and sometimes it's the othe…”
Junior Private Credit Sourcers Need 20 to 30 Sponsors for Deal Flow
“If you're covering large cap sponsors that do high volume, you know, the Advents or the Premieres, you know, Hellman Friedman, a couple of those will keep you pretty busy. And those obviously sit with probably our most experienced people. And then if you go do…”
Ares Opens Its Investment Committee Meetings to All Firm Employees
“We don't have a behind the door investment committee. Everybody in our organization literally sits in on our investment committees.”
Leveraged Loan Defaults Historically Concentrate in Six to Ten Industries
“So if you decompose the LCD index, it's really obvious where the defaults are. They're in six to 10 industries, and most of the other industries tend to outperform.”
Lenders Cannot Effectively Price Bad Credit Due to Asymmetric Downside Risk
“You can't price bad credit. You can try, but you probably won't be right. The thing that's tricky about credit is has a totally asymmetric risk profile. You get paid fees and you get paid a coupon and hopefully you get paid back. If you're wrong, you lose all …”
Ares Default Charge-Off Ratio Is Under 5 to 10 Basis Points
“So of course we have a cumulative default charge off ratio, which is very, very low, like under five and 10 basis points for both senior and junior assets.”
Lenders See No Pricing Delta Between $50M and $250M EBITDA Borrowers
“We actually don't see any delta in pricing or terms for the most part between a fifty million EBITDA company and a two hundred and fifty million dollar EBITDA company. Leverage levels are about the same. Pricing's about the same.”
Ares Caps Single-Position Fund Allocations Mostly Under One Percent
“We really don't like running portfolios probably more than two and a half percent positions just from an overall risk management perspective, but we're big enough now that most of the allocations to funds are less than one percent.”
Credit Markets Will Spend 2023-2024 Muddling Through Overleveraged Assets
“I think the remainder of this year and even into next year is going to be a lot of that. It's going to be a lot of just muddling through over levered assets and owners who aren't quite sure what to do about that.”
The US Has Too Many Banks and Smaller Institutions Face Trouble
“The reality is we have too many banks in the US, right? And we shouldn't have 4600 banks. So I wouldn't be surprised if there's a little more noise from some of these smaller banks.”
Sustained 12% Senior Debt Rates Would Cause an Economic Depression
“You can't finance the US economy with senior debt at 12%. You'll create a depression.”
Ares Estimates Non-Corporate Alternative Credit Is a $3T to $4T Market
“It's a very large market. We think it's a three, four trillion dollar addressable market.”
Domestic Nationalism Will Keep European Banks Active in Corporate Lending
“The banks won't quite exit the market completely. Because, you know, there's still some French banks, and they're nationalistic about lending in France, and there are German banks that want to lend in Germany, and Swedish banks that want to lend in Sweden, so …”
Contagion Risk Interconnects the Top 8 to 10 Alternative Asset Managers
“If something happens to Blackstone or Apollo or KKR, we're going to get the same question. What does your exposure look like? How do you guys think about this? So it's, yeah, there's an interrelatedness of eight or 10 of these companies for sure.”
Modern High-Yield Restructurings Are Driven by New Capital, Not Covenants
“The covenants are nice to have. They allow you to reprice risk along the way. We still have them in most of our middle market deals, but the big quality companies, syndicated loan market, et cetera, the high yield market, they don't have covenants. So the rest…”
New Liquidity Gives Capital Providers Power to Dictate Restructuring Terms
“And the only thing that's going to solve the lack of cashflow servicing a lot of debt is new liquidity. And if you have liquidity and you can drive terms on Outcomes. I think you're going to be pretty impactful. And if you don't have liquidity, I don't think y…”
Relying on 40% Loan-to-Value Metrics for Credit Safety Is Dangerous
“I think there's too much comfort gained by the, oh, we're only in at 40% LTV. And you're learning that right now in every asset class. Things, even in private markets, can revalue very quickly. So you have to have a lot of conviction around where you are in a …”