The past year was one of unprecedented activity and change for Los Angeles-based fund manager Ares Management. One thing chief executive and president Michael Arougheti is keen to highlight is the sheer level of fundraising and deployment. In the case of the former, Ares raised around $77 billion in organic fundraising over the course of 2021, according to its latest set of results.
“Of course, asset gathering does not equate with success in this business but it’s typically an indication that there’s been broad-based good performance on the investment side as well as a level of demand for the assets. From our strong fundraising base, we’ve been able to deploy capital quite significantly coming out of the pandemic across all of our private markets businesses, with a meaningful acceleration in private credit,” says Arougheti, speaking exclusively to Private Debt Investor.
Kipp deVeer, a director and partner of Ares Management and head of the Ares Credit Group, thinks it unlikely that the same level of deployment will carry on through 2022 – but still predicts a strong year.
He felt 2021 was a year in which fund managers were under pressure to deploy, having been focused on their existing portfolios amid the early outbreaks of covid-19 in 2020. He points out that, if you have a five-year investment period, losing a whole year is significant. And that’s why managers came charging out of the gates last year.
“I expect the activity levels in 2021 are going to be pretty difficult to reproduce any time soon,” says deVeer. “However, I believe all the fundamentals are in place for private capital to have another busy year. I do expect M&A activity to remain reasonably high and that the private markets in general will continue to take share from the public markets.”
Arougheti thinks there could be a surprise or two on the upside in terms of the level of activity. One reason is the weight of dry powder in the private equity market, which is “still significant” even though the urgency to invest it may not be quite so pressing. Secondly, he thinks a changing economic environment, including rate rises, could produce volatility in the traditional fixed income and leveraged finance markets that will see some large deals migrate into the private debt arena. Even if the volume of activity falls away, just a small number of very large transactions could compensate in terms of deployment of capital.
Aside from the level of fundraising and deal activity, last year was also notable for acquisitions. In June, the firm completed the acquisition of Landmark Partners, a specialist in the alternative asset secondaries market for more than 30 years. “We felt that the secondaries business was going through transformational change, including the move from LP-led solutions to GP-led, and it was also going through a pretty significant shift away from private equity-oriented strategies to areas like real assets and credit,” says Arougheti.
He points out that the firm executed its first continuation fund within its European private credit business in 2021, which saw it extend the life of an older vintage fund in the wake of raising its new €11 billion ACE V fund and believes that the as-yet nascent area of credit secondaries will continue to mature. Above all, though, Ares sees the Landmark deal as simply adding to its suite of financing options. “It’s not necessarily a private credit product per se but a GP financing solution that is in that intersection between private equity, private credit and alternative credit and we think we’re in a good position to take advantage of opportunities in that space.”
The second major acquisition completed last year speaks to the theme of alternative assets’ growing engagement with the retail market (covered in depth by this issue’s cover story, p. 12) with Ares in July announcing the acquisition of Black Creek Group’s US real estate investment advisory and distribution business. One of the major drivers for the deal was Black Creek’s reach into the retail channel. “Our Black Creek acquisition brings a very deep and well-established distribution capability in the non-traded REIT and wealth management sector and we believe that capability will ultimately be a growth engine for our global private credit business,” Arougheti points out.
The firm’s third major acquisition – officially completed shortly before this issue went to press – was that of AMP Capital’s infrastructure debt business. What appeals to Ares is the strong growth in the market that it can foresee, based on huge equity fundraisings such as Blackstone’s recent $23 billion effort. Arougheti points out that the AMP business was a leading debt provider to some of the larger sponsors in the market. “Some of the trends we see emerging in the corporate buyout space we’re also seeing emerge in the infrastructure space and we believe that’s going to be a meaningful area of growth for us.”
DeVeer sees the addition of the infrastructure debt platform as being consistent with Ares’ overall expansion into new areas. “In the US, we’ve built out dedicated sponsor and non-sponsor private credit teams and we have industry groups bringing in the required expertise in areas like power and project finance, speciality finance, sports media and entertainment and speciality healthcare. We’ve also expanded our capabilities in alternative credit, such as the recent build-out of our net lease team. There are many examples of things we’ve done to build out our private credit origination effort to try to stay ahead of the pack.”
If 2022 will not reach the same frenzied pitch as last year, the mood is arguably even more optimistic due to the sense that the market has moved past its most intense challenges. “We haven’t had many issues in the existing private credit portfolio and we don’t expect many on the horizon, so we can be pretty forward leaning,” says deVeer. “We believe we’re through the hardest period in terms of credit recovery and portfolio management and we feel our liquidity will serve us well in all market environments.”
And, when it comes to looking at the investing environment on a regional basis, it’s the US and Europe that are starting to look in better shape than Asia-Pacific. “The US and Europe are, for all intents and purposes, open for business even if they’re not fully open socially and culturally,” reflects Arougheti.
Asia-Pacific, on the other hand, may be more of a distressed opportunity in the period ahead. Arougheti indicates this situation would not be an unfavourable one for Ares, since it bought fund manager SSG in Hong Kong in 2020, and SSG focuses on special situations. In this respect, it exemplifies the firm’s claims to use acquisitions to plug any potential gaps.