Ares raises significant direct lending capital

The credit behemoth saw performance-related earnings swing wildly to report a large gain followed by a loss at the same time last year.

Ares Management lived up to its reputation as a fundraising juggernaut during the third quarter, as it pulled in $3.92 billion for its credit group alone, making up the lion’s share of the firm-wide total of $4.32 billion in capital commitments.

The credit group’s three largest commitments consisted of $841 million for its senior direct lending program, $707 million for the Arex XL CLO and $600 million in new debt issued by its business development company.

The other commitments comprised $569 million for high yield debt, $489 million for equity in other unspecified funds, $390 in US direct-lending mandates and $320 million to various funds managed by Ivy Hill Asset Management, one of the BDC’s portfolio companies.

The Los Angeles-based investment firm announced its third-quarter earnings Monday an economic net income (ENI) of $116.73 million, a figure that considers capital deployment and the performance of Ares’ various strategies. The ENI consisting of fee-related earnings of $45.33 million and performance fee-related earnings of $71.4 million.

Those figures differ materially from the earnings reported in the third quarter of 2015, when the firm recorded an ENI of $6.04 million, composed of fee-related earnings of $43.08 million and a performance-related loss of $37.05 million.

The steep increase in performance-fee earnings results resulted from the appreciation of Ares Corporate Opportunity funds III and IV, two private equity vehicles, and within the liquid credit strategies, the company said on the earnings call.

The credit group contributed to the overall earnings with an ENI of $90.26 million, consisting $65.46 million in fee-related earnings and $24.8 million in performance-related earnings. The Q3 figures are a year-on-year increase from $55.35 million in ENI, consisting of $60.53 million in fee-related earnings and a performance-related loss of $5.14 million.

The credit group listed a total of $62 billion in assets under management, contributing the largest portion to its firm-wide total of $97.3 million in AUM. Direct lending was the firm’s largest credit subset, with $22.6 billion.

As of 30 September, the Ares BDC reported a 12 percent net internal rate of return since its launched in 2004. Its Credit Strategies Fund reported a net 10 percent net IRR since its 2008 vintage year. Ares Capital Europe (ACE) II, a European direct lending fund, reported a net IRR of 7.4 percent since its 2013 inception. Its 2015 ACE III fund did not yet report a net IRR.

On the earnings call, Ares president Michael Arougheti addressed a question regarding the supposed deterioration in credit quality from Patrick Davitt of Autonomous Research.

“I don’t feel that our underwriting criteria or our investment behavior has changed one iota given some of the trends that that we're talking about,” Arougheti said. “I'm not seeing what I would think of as reckless lending behavior. I think what we are seeing as I talked about is the potential for structural deterioration or return deterioration if the liquidity in the market continues and the supply of investment opportunity doesn’t keep pace.”