Ares is flush with billions of excess capital post-merger

The extra money will go, in part, toward building out a partnership with Varagon Capital Partners. 

The 3 January closing of the Ares Capital-American Capital merger leaves Ares with a significant amount of room for investable capital, the firm’s executives told shareholders, analysts and other stakeholders on Wednesday’s fourth-quarter earnings conference call.

The excess capital reaches into the billions and leaves the company with “more than enough for the foreseeable future,” Kipp deVeer said. In fact, the firm’s substantial cushion is such that deVeer said Ares did not anticipate raising equity in the near future.

Notably, American’s balance sheet, which held no debt and excess cash, delevered Ares’ balance sheet from a 0.77x debt-to-equity ratio to 0.63x, significantly below the 1:1 regulatory limit. This gives the New York-based mid-market lender the option to inch its leverage back up to normal levels, giving the firm additional firepower if it so chooses.

The firm said it must strike a delicate balance between having so much excess capital at their disposal and being prudent about deploying that capital into good credits in a competitive environment. “There’s no doubt that’s the tension today,” deVeer said.

The merger will also allow Ares to build out its senior direct lending programme it launched with Varagon Capital Partners. This comes as Ares is winding up a similar venture with GE Capital, its senior secured loan programme, which has reduced its outstanding loans from $8.54 billion to $3.82 billion. Loan repayments have come quicker than expected, deVeer said.

Ares also announced it received exemptive relief, meaning it can co-invest alongside other funds managed by Ares Management, Ares Capital’s indirect external manager. DeVeer said deal allocation between funds will depend on the investment mandate of any given vehicle and whether the deal is a good fit for the fund.

Fourth-quarter commitments stood at $1.16 billion, a decrease from the $1.53 billion made in the third quarter but a year-on-year increase from the $972 million made in the fourth quarter of 2015. The firm exited $1.1 billion in commitments in the fourth quarter.

The most significant commitment Ares reported is a $320 million hold position from the $1 billion first lien-second lien financing provided to Insight Venture Partners to back the buyout of Ministry Brands, which provides software services to faith-based institutions.

The firm reported $261 million in total investment income, which included $195 million in interest income and $22 million in dividend income. Net investment income stood at $138 million, a year-on-year decrease from $159 million in the fourth quarter 2015. Net investment income for 2016 was $494 million, a slight decline from 2015’s $508 million. 

Ares’ year-on-year net asset value per share remained essentially unchanged at $16.45 as of 31 December, compared with $16.46 as of 31 December 2015. The firm’s end-of-2016 NAV did decrease slightly from $16.59 as of 30 September.