Ares’s first infra debt fund close is a $5bn home run

One year after the acquisition of AMP Capital’s infrastructure debt business, Ares Management has closed the fifth fund in the series – and its first infrastructure debt fund on $5bn, hailing it as the largest-ever infrastructure debt fund.

What began as AMP Capital Infrastructure Debt Fund V was launched in November 2020 – by the end of the year, the fund had made its first investment, and by the end of 2021 the fund had traded hands to Ares Management.

Now, 12 months later, said fund has closed at $5 billion, though it goes by Infrastructure Debt Fund V, with the AMP Capital label removed after the sale to Ares.

“We believe it is the largest global infrastructure subordinated debt fund closed, which is a meaningful achievement for Ares,” said Patrick Trears, partner at Ares Management and global head of infrastructure debt.

Trears held the same position at AMP Capital after previous incumbent Andrew Jones decamped to QIC in June 2020.

“Integration with Ares has been seamless,” Trears divulged. “The firm has its DNA in credit, so the addition of our team has been beneficial for both parties. Investors demonstrated their confidence in Ares’s ability to deliver customised credit solutions. Ares was seeking to enhance its global infrastructure strategy, and when AMP announced they were selling, it was a natural fit.”

From rags to brags

AMP Capital’s infrastructure debt platform was bought in the worst of situations for the parent amid reputational disarray, resulting in Ares snapping up the platform for A$428 million ($310 million; €273 million).

Twelve months and $5 billion later, the platform has new success. While affiliate title Infrastructure Investor understands that the fund’s LP base didn’t differ much in profile, it did in breadth. “Given its scale, Ares has very deep and broad LP relationships across the globe, which have continued to benefit our strategy. Ares was instrumental in the capital raise,” Trears said.

He continued: “Ares contributed a lot to the overall stability and continuity of the fund. [The firm] gave investors’ confidence.”

Ares declined to comment on targeted IRR and the fund’s hard-cap. The firm also declined to comment on whether or not a Fund VI was in the works. The strategy has typically deployed mezzanine debt with a targeted gross IRR of 10 percent.

So far, $2 billion has been deployed – some of which, though how much is unclear, was deployed under AMP’s watch. “We’ve invested this $2 billion across our five pillars,” said Trears. “Digital, utilities, renewables, energy and transportation sectors. We’re seeing the largest demand in energy and digital.”

While the fund will primarily invest in North America and Europe, it is also looking into APAC. One such investment is a sustainability-linked loan to EdgeConneX, a global data centre business. The first of its kind for Ares, this loan will hold the company to certain ESG criteria, which if met will result in a small reduction in the cost of the capital – and, if not met, will result in a consequential increase.

“For EdgeConneX, the data centres need to use a certain amount of renewable energy, for instance. The criteria for future sustainability-linked loans will be different depending on the asset in question,” Trears commented. “I expect sustainability-linked loans to become more mainstream over the next six to 12 months. Borrowers and our LP base are focused on ESG.”

Not only does this $5 billion represent a big moment for Ares, but for infrastructure debt in general. Why such explosive growth, and why now? Trears explained: “LPs are looking to diversify their infrastructure portfolios between equity and credit. Additionally, the credit market is shifting – you see the retrenchment of large banks, which makes private capital providers like Ares more attractive for borrowers. And LPs see that.”

He added: “They see those strong risk-adjusted returns as well as the capital position and where infrastructure debt sits, versus the valuations you see on the equity side. In the current market, we see LPs continuing to shift towards credit in terms of risk-adjusted returns overall.”

This article first appeared in affiliate publication Infrastructure Investor