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Ares closes $3.7bn alternative credit fund at its hard-cap, nearly doubling target

Pathfinder Fund hopes to set a trend by donating at least 10% of carried interest profits to health and education charities.

Ares Management said it has held a final close on its Ares Pathfinder Fund at its $3.7 billion hard-cap, nearly double its $2 billion target.

Pathfinder, managed by Ares’ Alternative Credit team, invests in alternative credit assets which are often asset-backed, and often provide large-scale financing for those who finance other businesses. For example, its predecessor, Ares Indicus Credit Opportunities Fund III, or Ares ICOF III, led a $400 million loan for Chimera Realty, a publicly traded mortgage REIT, in June of last year.

The new fund, launched in January 2020, is also notable in that Ares and Pathfinder’s portfolio managers have committed to donating at least 10 percent of the fund’s carried interest profits to global health and education charities, according to a news release. Ares said it believes Pathfinder is the first institutional private investment fund to use a pre-defined structure to make such a substantial commitment to charity, and its managers are hoping to set a trend in the industry.

The fund had an original target of $2 billion, but as the asset class grew, Ares was able to raise additional capital and ultimately reached a hard-cap of $3.7 billion. It’s unclear whether the charitable feature of the fund, which was named Pathfinder to reflect the manager’s allocation of a portion of its performance fee to charity, contributed to the fund’s oversubscription. Although the predecessor fund, Ares ICOF III, fell short of its $500 million target, the $405.2 million of capital it attracted was more than double that of its predecessor.

Ares said the Pathfinder fund attracted strong interest from more than 80 investors hailing from all over the world and from a broad spectrum of institutional investors, including public and corporate pension funds, sovereign wealth funds, insurance companies and the like. The fund attracted both existing and new clients, with 34 percent of the commitments representing investors new to Ares.

While Ares didn’t elaborate on terms, it is understood that Pathfinder has a 1.25 percent management fee with a 0.02 percent administrative fee on invested capital. Carried interest is 20 percent with a 6 percent preferred return and European-style waterfall distribution structure. Pathfinder’s target internal rate of return is 11-13 percent, consistent with the predecessor funds.

Pathfinder “is focused on directly originated private investments, as well as asset portfolios”, Keith Ashton, partner and co-head of Ares Alternative Credit, told Private Debt Investor. He said that it is “often the case that we finance the finance people”. This type of financing has “higher barriers to entry, so you need a large team to enhance sourcing”, Joel Holsinger, partner and co-head of Ares Alternative Credit, said in the interview. “We’re the largest direct lender, and about one-third (of deals) are sourced from the broader Ares platform,” Holsinger said.

Kipp deVeer, head of Ares Credit Group, noted in the news release that the firm sees “distinct similarities” between today’s alternative credit market and that of the corporate direct lending market of 10 years ago, when it was gathering steam after the global financial crisis. He said Ares has “strong conviction that there is a sizable and growing market” in which to make attractive investments, and the firm intends to continue to invest time, capital and resources to support its growth.

Indeed, Ares Alternative Credit, which was established in 2011, has seen a doubling of its assets under management over the past two years. Alternative Credit managed about $13 billion across more than 25 funds as of 31 December 2020. Ashton said that investors appreciate the strategy’s emphasis on downside protection and capital protection, as well as the “uncorrelated, income-oriented return” Alternative Credit seeks to deliver across market cycles.

In the interview with PDI, Ashton attributed the growth of the private alternative credit market to the regulatory and other changes wrought by the financial crisis, in which large institutional players had to unwind their pools of capital. “This portion of the credit market has devolved and has become less institutional and more fragmented since the GFC,” Ashton said, as banks and other institutional lenders such as GE Capital and CIT have stepped back. That has created an opportunity for private market lenders with scale to fill the void. “An economic shock like the covid-19 pandemic only exacerbated the inefficiency,” he said.

Holsinger added that “as much as direct lending is EBITDA focused, everything we do is generally in portfolios that are asset-focused investments”. He said Ares looks at the durability of contractual cashflows to make sure the cashflows stand up.

As for Pathfinder’s charitable feature, Holsinger said that he had supported global health non-profits for many years, and that the new commitment was his and Ares’ way of having “a really meaningful impact” in global health and education. The firm said in a statement that it would partner with non-profit organizations that have a track record of delivering “high value per charitable dollar contributed”. Holsinger said the charitable feature is “definitely part of our team’s DNA and not a marketing ploy”.

Ashton agreed. “We’re trying to embed a purpose into what we really enjoy doing every day” he said, adding that Ares is “hoping to inspire other managers to do likewise”.