Ares CEO sees financing deals with direct lenders reach $ 5 billion

Ares Management, one of the dominant players in private credit, now underwrites contracts of up to $ 3 billion and may soon provide loans of up to $ 5 billion to a single borrower, CEO Michael Arougheti said.

Private equity firms are increasingly bypassing syndicated loans arranged by banks and turning to direct lenders, usually at a higher cost. The reasons include speed of execution, confidentiality or a need for unconventional financing.

“It’s accelerating,” Arougheti said Wednesday in New York. “There are clear circumstances where private markets, even though they are more expensive, offer a much better value proposition to sponsors.”

Ares, along with Blackstone, Apollo Global Management and Blue Owl Capital, is one of a small handful of direct lenders able to challenge banks in debt buyout financing. It was the first, in 2016, to take out a so-called unitranche loan of over $ 1 billion.

At $ 5 billion or less, borrowers are willing to pay extra for the flexibility of dealing with a direct lender, a premium Mr. Arougheti has set at 50 to 100 basis points. Plus and the cost of syndicated bank credit is just too cheap to ignore, even though it takes longer and involves more complexity, he said.

Right now, the pandemic’s merger boom in the United States is fueling demand for private debt financing. But Europe is quickly catching up.

“Europe has historically been five or ten years behind the US market, but this trend of large-scale borrowing and LBOs is also accelerating there,” Arougheti said.

Institutional investors and, increasingly, individuals invest money in direct lending funds because they offer higher returns than corporate bonds or syndicated loans. Mr Arougheti said Ares raised almost as much in the first half of the year as it did in 2020 as a whole and demand has remained as strong ever since.

Earlier this year, Ares acquired Landmark Partners, a specialist in buying and selling stakes in limited partner funds, and US real estate operations from Black Creek Group.

Mr Arougheti predicted that the pace of consolidation among alternatives managers would continue to accelerate and said Ares intended to expand, in part through acquisitions, in the areas of credit, real estate and infrastructure. Lower priority is private equity, in which the company manages around $ 31 billion in assets.

“Private equity: it’s a great business. In my opinion, this is not a growing business, ”he said. “The investment market opportunity is just not the same.”