(Bloomberg) -- Liquidity pumped into the credit markets during the pandemic could stave off a spike in defaults for several years, Ares Management Corp. Chief Executive Officer Michael Arougheti said.

“There’s underlying stress that will find its way into the markets but I don’t think that’s anytime soon,” Arougheti said at a virtual Bloomberg News event this week. Default rates are “artificially low” and asset prices are buoyant because “there’s so much liquidity masking that default rate that we’ve all grown accustomed to seeing at this point in the cycle that we’re probably two to three years out before we start seeing a traditional default cycle play out.”

Progress against Covid-19 and a strengthening economy are providing support for small businesses, helped by the Federal Reserve’s easy monetary policy and the Biden administration’s focus on growth, according to Arougheti, whose alternative-investment firm oversees about $197 billion in assets. While the forecast is improving, large swaths of the economy including retail, hospitality and travel have a long road to recovery.

“The outlook for small business is probably better than I would have predicted as recently as six months ago, but we’re not quite out of the woods yet,” he said.

This is creating openings for lenders to provide capital to companies that haven’t had access to federal stimulus money, including small businesses or non-traditional borrowers who banks avoid that can use their assets as collateral.

More Mergers

Arougheti expects more mergers in his business, helped by the growth in private credit. “The alternatives-asset management space is consolidating and moving to scale,” he said.

Private Credit to See Expansion, Consolidation in 2020: Dechert

Part of that is due to supply and demand dynamics -- the larger a manager is, the better access it has to quality investment opportunities that drive higher returns and out-performance. Bigger players are also able to write larger checks to win deals and score better talent.

“And that’s when you get into this virtuous cycle of scale begetting scale,” Arougheti said.

Private credit -- the illiquid counterpart to the leveraged loan and high-yield bond market that has grown to $890 billion -- is on pace for continued expansion, according to Arougheti.

The firm sees opportunity in Europe and Asia for the asset class, and expects new investors to be attracted to both its resiliency during the pandemic and the ability to find yield in a low-rate environment.

“It grows as the economies grow, it grows as banks consolidate and change risk behavior, it grows as investor demand for the asset class continues to shift,” he said. “I think we’re just getting started -- for every market that we plan that is maturing, a new market is opening up.”

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