Ares Management, one of the market’s top private debt investors, unveiled a second Pathfinder offering geared to asset-based opportunities.
Ares Pathfinder II Fund is expected to reach a size of $5 billion, according to a report by New Mexico State Investment Council. A first closing is anticipated “on or around” March 2023.
Fund II is slated to be bigger than Ares’ debut vehicle. At $5 billion, it would be 35 percent larger than Ares Pathfinder I Fund, closed two years ago at $3.7 billion.
In a tough fundraising market, private credit seems to be thriving as LPs seek refuge from uncertainty and volatility caused by high inflation and interest rate hikes. For investors, the asset class is attractive because of characteristics like floating rates. As central banks lift interest rates to battle inflation, private debt rates rise in tandem.
One measure of LP appetite is increasing overallocation. Private Debt Investor’s LP Perspectives 2023 Study, released in February, found almost one in five investors overallocated to private credit, up from 3 percent in 2022 and the first time the share has exceeded 10 percent in the past six years.
Nonetheless, 89 percent of LPs plan to deploy the same or more capital to the asset class over the next 12 months, the study found.
Ares’ Pathfinder funds, managed by the alternative credit team of Ares Credit Group, aim to generate income and long-term capital appreciation through flexible investing in the complex world of asset-based opportunities.
The focus is on collateralised investments in large, diversified portfolios of assets that generate predictable and contractual cashflows across market cycles. These are mostly directly originated opportunities in sectors that are “often overlooked or misunderstood”, the NMSIC report said.
Asset exposures can range from loans/leases to receivables to royalties/fees with the common feature being that investments are collateralised through contracts and/or physical assets, the report said. Investments are typically collateraliaed by pools of underlying assets, such as autos, shipping containers, receivables, supermarkets, and rental units.
A key aspect of the debut Pathfinder fund is its social impact pledge, with Ares committing to donate at least 10 percent of the vehicle’s carried interest profits to global health and education charities. While this was not referenced in the NMSIC report, Fund II is expected to take a similar approach.
Fund II will construct a portfolio of about 30 to 50 investments, according to the NMSIC report, and shoot for an 11 percent to 15 percent-plus net IRR.
Ares Pathfinder I Fund appears to be surpassing its original performance target. At the end of last year, it was earning a 15.9 percent net IRR, the report said, with Ares projecting a final net IRR of 16 percent to 19 percent.
Last October, Ares set a more than $45 billion target for its next fundraising campaign based on the launch of new private debt, private equity, real assets and secondaries flagships. The campaign, which now includes the latest Pathfinder offering, is expected to drive near-record capital raising this year, CEO Michael Arougheti said in a Q4 2022 earnings call.
The Pathfinder funds are directed by Joel Holsinger and Keith Ashton, partners and co-heads of alternative credit.
Ares declined to provide a comment on this story.