Ares Management, a dominant player in the personal lending business, is currently writing up to $ 3 billion in business and could shortly lend up to $ 5 billion to a single borrower, said CEO Michael Arougheti.
Increasingly, private equity firms bypass bank-arranged syndicated loans and turn to direct lenders, usually at a higher cost. Reasons for this include the speed of execution, confidentiality or the need for unconventional financing.
“It’s accelerating,” said Arougheti on Wednesday in New York. “There are clear circumstances in which the private markets, while more expensive, offer sponsors a much better value proposition.”
Ares, along with Blackstone, Apollo Global Management and Blue Owl Capital, is part of a small handful of direct lenders the size to challenge banks to finance leveraged buyouts. It was the first company to sign a unitranche loan for more than $ 1 billion in 2016.
At $ 5 billion or less, borrowers are willing to pay a premium for the flexibility of dealing with a direct lender, a premium that Mr. Arougheti puts in 50 to 100 basis points. Plus, the cost of syndicated bank loans is just too cheap to go without, even if it takes longer and is more complex, he said.
The pandemic-induced boom in US mergers is currently driving demand for private debt financing. But Europe is catching up quickly.
“Europe has historically been five or ten years behind the US market, but that trend towards big loans and big LBOs is accelerating there too,” Arougheti said.
Institutional and, increasingly, private investors are investing money in direct loan funds because they offer higher returns than corporate bonds or syndicated loans. Arougheti said Ares raised almost as much in the first half of the year as it did in all of 2020, and demand has remained so strong since then.
Earlier this year, Ares acquired Landmark Partners, a specialist in buying and selling limited partner funds, and the US real estate business of Black Creek Group.
Predicting the rate of consolidation among alternative asset managers, Arougheti said Ares intends to grow in part through acquisitions in credit, real estate and infrastructure. Private equity, in which the company manages approximately $ 31 billion in assets, has less of a priority.
“Private Equity: This is great business. In my opinion, it’s not a growth business, ”he said. “The investable market opportunity just isn’t the same.”