Ares ups expected size of latest direct lending fund by $1.2bn

The firm’s direct lending strategy also holds the keys to the vast majority of its potential future management fee earnings.

Ares Management has locked down $2.2 billion for its US direct lending private fund out of a year-end target of $4.7 billion including leverage – up from its previous target of $3.5 billion, firm management said on Thursday.

Los Angeles-based Ares closed on $1.6 billion by the end of the third quarter for its Ares Senior Direct Lending Fund and has closed on $600 million since quarter’s end.

The firm also partnered with a “major insurance company” to set up a structured credit joint venture focused on private asset-backed securities with total third-party capital of $3 billion, Ares chief executive Michael Arougheti said on its third-quarter earnings call. The vehicle has already closed several deals, he added.

Firmwide assets under management stood at $125.1 billion, with $91.5 billion of it being in credit, according to the earnings presentation. Fee-related earnings stood at $64.42 million – up 11 percent from the $57.98 million at the same time last year.

Ares has shadow asset under management of $25.8 billion. Approximately $21.7 billion will earn management fees, which equates to $233.3 million in future management fees, chief financial officer Michael McFerran said on the call. Some 90 percent of that is tied to the firm’s direct lending strategy, which includes its Ares Capital Corporation (ARCC) business development company.

The $233.3 million figure does not include adjustments for certain ARCC fee provisions, including the expiration of a fee waiver and additional management fees earned on the higher leverage levels under which BDCs can now operate. That would result in an additional $115 million, creating the potential for close to an additional $350 million in management fees.

At 0.63x, ARCC was at below its target 0.75x debt-to-equity ratio, the BDC’s earnings results earlier this week showed. The average EBITDA for ARCC’s portfolio companies has grown over the past year from $62.2 million to over $92.9 million.

This is not to say the firm is turning away from smaller deals, ARCC chief executive Kipp deVeer said on the earnings call.

“The weighted average number tends to skew up, obviously, because some of the larger companies are writing larger checks, right? It’s just sort of the way that business works,” he said according to a transcript of the call. “So, I don’t want this number to skew people to say that we’re not interested in smaller transactions, we’re not finding value in more traditional middle market transactions, because we are.”

ARCC increased its net asset value per share to $17.16 – up from $17.05 at the end of the second quarter and $16.49 from the third quarter of last year.