Ares reaches $3.4bn close for second lien, mezzanine vehicle – exclusive

The private credit behemoth launched a private fund for the strategy to address a growing market gap and increase its hold size.

Ares Management has closed its first junior debt fund $900 million above its $2.5 billion target, rounding up money from both US and global investors.

The Los Angeles-based firm wrapped up its Ares Private Credit Solutions fund at $3.4 billion, which will allow the firm to boost its deal activity in the upper mid-market. On the firm’s earnings call last month, newly minted chief executive Michael Arougheti said total capital commitments stood at $3.2 billion.

“A big part of why we raised this fund was to migrate ‘up market’ into larger companies, where we continue to bring private capital into a market segment that is less crowded from competition,” Jim Miller, a partner and co-head of US direct lending for Ares, said.

The vehicle, which included more than 50 investors, began investing in April and has deployed 20 percent of its capital.

“The fund is focusing on North American companies by leveraging the middle-market sponsor business we’ve been building over the last 13 years,” said Michael Smith, Partner and co-head of the Ares Credit Group. “In addition, we may invest a small portion of the fund in the European market as well.”

“The fund will target upper middle-market companies,” he continued, “which we define as those with EBITDA above $75 million, which generally implies enterprise values of greater than $750 million.”

Ares’ corporate junior debt vehicle is one of the few mega-funds targeting investments lower in the capital structure this year, according to PDI data. Some 20 percent of the capital raised this year has been for subordinated or mezzanine credit.

Last year, a number of multibillion-dollar mezzanine funds were raised, including HPS Investments’ $6.6 billion HPS Mezzanine Partners III and GSO Capital Partners’ $6.5 billion GSO Capital Opportunities Fund III. Crescent Capital Group’s $4.6 billion Crescent Mezzanine Partners VII, which raised much of its capital in 2016, ended up holding a final close in January.

Ares’ vehicle will let it increase its hold size for junior loans.

“The fund’s average hold size will be between $150 million and $250 million, Smith explained. “The hold size for these investments across the Ares credit platform, which will include other vehicles and funds, is up to $500 million.”

“Nearly all of [the] initial commitments have been first lien-second lien structures,” said Jim Miller, Partner and Co-Head of U.S. Direct Lending for Ares. “While we will make mezzanine loans, we prefer the floating rates and the relative security that second lien debt provides.”