Ares Management, a leading player in private lending, is now underwriting contracts of up to $3 billion and could soon lend 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. 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, while 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 financing leveraged buyouts. It was the first, in 2016, to take out a so-called unitranche loan for more than a billion dollars.
At $5 billion or less, borrowers are willing to pay a premium for the flexibility to deal with a direct lender, a premium Arougheti estimated at 50 to 100 basis points. Beyond that, the cost of syndicated bank credit is simply too cheap to ignore, even if it takes longer and involves more complexity, he said.
Right now, the pandemic-driven merger boom in the United States is fueling the demand for private debt financing. But Europe is catching up fast.
“Europe has historically been five or ten years behind the US market, but this trend of big loans and big LBOs is accelerating there as well,” Arougheti said.
Institutional investors and, increasingly, retail investors are pouring money into direct loan funds because they offer higher yields than corporate bonds or syndicated loans. Mr Arougheti said Ares collected almost as much in the first half of the year as it did in all of 2020 and demand has remained just as strong ever since.
Earlier this year, Ares acquired Landmark Partners, a specialist in buying and selling interests in limited partner funds, and the U.S. real estate business of Black Creek Group.
Mr Arougheti predicted the pace of consolidation among alternative managers will continue to accelerate and said Ares intends to expand, partly by acquisition, into credit, real estate and infrastructure . Private equity, in which the company manages about $31 billion in assets, is a lower priority.
“Private equity: It’s a great business. In my mind, it’s not a growth business,” he said. “The investable market opportunity just isn’t the same.”