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US NEWS: Out of the shadows

Ares Management has fulfilled its wish to break into real estate with the acquisition of the ‘best kept secret in real estate'. PERE Magazine, September 2011 issue

When Los Angeles-based Ares Management went public with the acquisition of a Chicago-based real estate finance provider last month, the investment industry sat up and paid attention. Until that moment, Ares was simply known as a specialist in alternative assets. With the takeover of Wrightwood Capital, however, it suddenly has become a player.

Ares started out as a spinoff from Apollo Management in 1997, when Apollo co-founder Tony Ressler created the company to focus on alternative assets such as leveraged loans, high-yield bonds, distressed debt, mezzanine debt and private equity. The Wrightwood deal will expand the firm’s “reach into commercial lending – an area we see as having attractive long-term growth opportunities,” Ressler said in a statement.

Given its small presence in real estate, it is understandable that Ares has not figured much on the radar of the private equity real estate industry. However, a clue about its desire to break into the sector through a takeover arrived towards the end of 2010, when it was a surprise name as a potential bidder for ING Real Estate Investment Management, alongside other groups wishing to make inroads into real estate such as Kohlberg Kravis Roberts. The Dutch group eventually fell into the hands of Richard Ellis earlier this year.

Yet, Ares as a company is no small force. It has $42 billion in committed capital under management and more than 440 employees in the US, Europe and Asia.

The 40-plus Wrightwood professionals that Ares has gained through the transaction will focus on middle-market lending in commercial real estate and become part of the Ares Commercial Real Estate (ACRE) investment team that will be based in Chicago and have offices in Dallas, Los Angeles, New York, Newport Beach and Washington, DC. The team, which falls under the Ares Private Debt Group, will be headed by John Bartling, a senior partner of ACRE and Ares’ global head of real estate, and by former Wrightwood chairman and chief executive Bruce Cohen, who now will serve as a senior partner of ACRE.

Cohen, who founded Wrightwood in 2004, once said in a magazine article in 2007: “We’re the best-kept secret in the real estate industry.” In Wrightwood, Ares has a firm that provides senior debt investment in the $10 million to $50 million bracket. It also has a second leg to the business, namely mezzanine lending. That arm provides mezzanine debt, preferred equity or joint venture equity for properties valued up to $75 million.

Cohen agreed to the acquisition by Ares after deciding that the best way forward for his company was to become part of another platform, according to a source. Since Ares had about eight to 10 people in its fledgling real estate team prior to the Wrightwood acquisition, there is very little overlap between the two firms, the source noted, calling the deal a “good marriage.” Bolstered by the Wrightwood deal, Ares likely will want to grow its assets and further expand its business, perhaps with an expansion into other types of real estate products, the source surmised. 

“The addition of the Wrightwood investment platform enhances ACRE’s ability to address a significant and growing need for financing solutions in middle-market commercial real estate,” Bartling said in a statement. “We have seen this story unfold in middle-market corporate credit and see the ability for Ares to continuously take meaningful market share from traditional lenders, which are under pressure to withdraw and/or are unable to adapt.”