Ares credit platform dominates firm’s Q2 fundraising

The direct-lending behemoth has raised $1.6bn for its $2.5bn junior debt fund.

Separately managed accounts continue to be a growing part of Ares Management’s business, executives said on the Los Angeles-based firm’s second-quarter earnings call, with those commitments across all strategies comprising 20 percent, or $14.1 billion, of its fee-paying assets under management.

For the three months ending 30 June, Ares raised $5.51 billion across credit, private equity and real estate, with $4.35 billion going toward credit strategies. That total included a $350 million SMA with a European direct lending strategy for an unspecified US pension fund.

“[A] big trend in our space is that the larger institutional LPs are consolidating their manager relationships,” Ares president Michael Arougheti said on the call. “They are reducing the number of managers they have on their platform and allocating larger commitments to folks like Ares who can manage multiple strategies.”

That trend lessens the work on limited partners’ investment staff as there are fewer managers to oversee, and by allocating larger amounts, those investors can negotiate better fee structures, Arougethi said.

Additionally, the North Dakota State Investment Board allocated $200 million to Ares or a mid-market direct lending separate account at its January meeting.

Broken down by credit strategy, capital raised included $957 million for its US direct lending group for new and additional equity commitments for multiple funds and SMAs along with $571 million for its Ares Capital Europe III direct lending fund. The junior debt-focused private fund pulled in $457 million in new equity commitments in the second quarter. In all, the vehicle has closed on $1.6 billion toward a $2.5 billion target.

The firm reported $104 billion in assets under management. Of that $70.6 billion was fee-paying AUM, which generated $191.6 million of unconsolidated management fees and other fees. That figure included $19.1 million of quarterly performance fees on the investment income from its business development company, Ares Capital Corporation.

In January, ARCC closed its merger with American Capital, and as a result, there are now $1.1 billion in low-yielding or non-yielding assets on ARCC’s books. Arougheti said Ares expects to see an increase in incentive fees as ARCC offloads those assets and invests in higher-yielding assets. As part of the transaction, Ares also waived $100 million of ARCC fee payments, which breaks down to $10 million for 10 quarters.

Fielding a question from Ken Worthington of JPMorgan on whether additional BDC mergers were on the table, ARCC chief executive officer Kipp deVeer said they are happy to be considered if a situation arises, but noted that the BDC doesn’t pursue unwanted transactions.

“We want to do things in a consensual fashion,” he explained, saying Ares was “not in business of launching hostile acquisition attempts”.

“If there is a situation like an Allied Capital or American Capital, we’re thrilled to be part of that discussion, but I think consolidation in that sector is tough for a whole number of reasons.”

Economic net income for the quarter was $158.05 million, consisting of $53.39 million in fee-related earnings and $104.67 million in performance-related earnings. (Figures may not add up due to rounding.) ENI for the second quarter was up from $102.35 million, or 67 percent, from the same time last year.