Ares Management held a first close on more than $1 billion this week for its debut junior debt direct lending fund, the alternative asset management firm said on Friday’s fourth-quarter earnings call.
Michael Arougheti, co-founder and president of Ares, said a little more than half of those committing to the fund are first-time Ares investors. The fund will target high yield, second lien and mezzanine debt investments.
Last week, Ares disclosed in filings with the US Securities and Exchange Commission that it would be raising up to $2.5 billion for the Ares Private Credit Solutions fund, though it was not clear if that specific vehicle is the junior debt fund.
The initial close came as Ares reported it raised $1.94 billion across its credit platform in the fourth quarter, including two collateralised loan obligations, a $614 million US deal and a $439 million European transaction. Ares raised $2.15 billion across all strategies in the fourth quarter.
The firm raised $10.56 billion for the year, of which US CLOs were the largest driver, raising $1.83 billion. It also brought in $1.23 billion for its Ares Capital Europe III fund, which brings the total vehicle size to $4 billion. Ares’ firm-wide fundraising total for 2016 was $13.94 billion.
Ares deployed $2.8 billion across all its strategies in the fourth quarter, of which credit made up $2.32 billion. A significant portion went to direct lending in both the US and Europe, Arougheti said on the call. The firm-wide total for the fourth quarter represented a year-on-year decline from the $4.1 billion deployed in the fourth quarter of 2015.
Credit group head Kipp deVeer said he believes the firm is well-placed competitively in European direct lending, noting the firm began talking to investors there about the asset class in 2008. DeVeer added he does not anticipate European banks pulling back from mid-market lending to the same degree that US banks did. European banks, he said, will likely want to keep lending to the mid-market.
Full-year gross returns for European direct lending and syndicated loans stood at 9 percent, while high yield achieved a gross return of 12.8 percent in 2016. Elevated returns boosted the firm’s performance-related earnings. For the fourth quarter, Ares generated $22.91 million in its credit group, up from a $13.18 million loss in Q4 2015. Total performance-related earnings for its credit group stood at $70.69 million in 2016, an increase from $9.69 million in 2015.
The firm reported a total $113.75 million in economic net income for the quarter and $356.98 million for the year, notching year-on-year increases from $51.44 million and $216.38 million, respectively.