Ares plots commercial finance, European funds

The direct lending group of the alternative investment firm has already started raising money for its first commercial finance fund and plans to raise its third European fund later this year.

Having invested over half of the money in the Ares Capital Europe Fund II, Ares Management is planning to get its third one off the ground later this year, said president Michael Arougheti (pictured) on the firm’s earnings call on 5 March. In addition, the firm began raising capital for its debut Ares Commercial Finance LP fund earlier this year. Arougheti declined to comment on fundraising targets.

The second European fund, Ares Capital Europe II, raised €1.5 billion in 2013. The firm has continued to gather assets for the strategy in separate account form and added $650 million in the fourth quarter, Arougheti said. 

The commercial finance strategy is run by an asset-based lending team Ares acquired from Keltic Financial Services in June last year. Mitch Goldstein, senior partner in the direct lending group, oversees the group, which has already started making investments. Surge Staffing, a US human resources company, received a $9 million senior secured revolving credit facility from the vehicle in February, according to a statement from the company. 

Firm wide, Ares raised $16 billion across its four business lines (private equity, tradable credit, direct lending and real estate) in 2014. Chairman and chief executive Tony Ressler estimates the group has about $18 billion in dry powder, or about 22 percent of its total AUM, to deploy.  

Ares’ AUM grew to $81.6 billion, representing a 10.5 percent rise year-on-year. The assets in the direct lending group also rose to $28.7 billion at the end of last year from $27.5 billion at the end of 2013. 

Though assets rose, economic net income dropped to $289 million from $329 y-o-y. “Our net investment income was impacted by the late December volatility in our unrealized public holdings in ACOF Asia and, to a lesser extent, by the lower performance related earnings caused by weaker loan and high-yield markets,” explained Arougheti.  

ACOF Asia (Ares Capital Opportunities Fund Asia) is a private equity fund that the firm raised at $500 million in 2012. 

“Despite strong corporate fundamentals outside the energy sector, the liquid credit markets were disrupted during the fourth quarter due to shortfalls in global economic data, plunging oil prices and unexpected declines in interest rates, all of which drove an aversion to risk assets,” he added.  

Ares Capital Corporation, the firm’s publicly traded BDC, posted noticeably strong earnings for the fourth quarter, at a time when many BDCs and publicly traded alternative asset managers, including ARCC’s parent, are reporting earnings losses due to weakening credit markets and the fall in oil prices.  

Arougheti mentioned on the 5 March earnings call that ARCC returned 12 percent on equity for the full year 2014 and showed improved credit performance that year. Kipp deVeer, co-head of the direct lending group and chief executive of the BDC, also said the vehicle had minimal exposure to oil and gas (about 1 percent) on ARCC’s separate earnings call on 26 February.  

At the time, ARCC declared a dividend of $0.38 per share and an additional dividend of $0.05 per share. Its net investment income rose to $128 million in the fourth quarter, from $105 million in the third quarter and $111.5 million in the last quarter of 2013. 

The portfolio amounted to about $9 billion at fair value, with investments in 205 companies. Most of the investments were in first lien senior secured loans (41 percent) and second lien senior secured loans (21 percent), while 23 percent went to Ares’ Senior Secured Loan Program (SSLP), a partnership with GE Capital.