Ares blows past target on special opportunities fund amid pandemic dislocation

The firm raised $1bn more than its original $2bn target and could go as high as $3.5bn, partner Scott Graves said.

Ares Management has closed on $3 billion for its special opportunities fund, inching toward its $3.5 billion hard-cap amid a market environment the firm says is ideal for its platform.

The fund has grown considerably from its original $2 billion target due to the opportunities provided by the coronavirus pandemic-fueled market dislocation, Ares Partner Scott Graves told the board of Teachers’ Retirement System of Louisiana Thursday.

“This increased amount of capital gives us the opportunity to incrementally diversify and be very, very active on the rescue financing side, being able to stand up for more capital giving us a higher probability to get things done,” he said. “I believe that there will be a significant need for liquidity and rescue capital in this cycle.”

The Special Opportunities strategy is a mix of public and private debt. Private equity consultant Hamilton Lane told the board the fund seeks to provide financing for middle market businesses in need of capital. That can include debt, equity, preferred equity, pure equity, rescue lending and a variety of others. It is primarily a non-control strategy.

Ares closed on just over $1 billion in the fund last year, according to a Form D, and began investing. As of March 31, the gross rate of return was 29.2 percent with a 1.1x multiple. As of Thursday, the fund had 10 core positions that made up more than 2 percent of the fund, and 17 total positions that made up less than 2 percent of the fund. Its portfolio was 90 percent debt and 10 percent equity.

Graves said the fund started buying public assets in March and April, which now make up 15 percent of its portfolio, evenly split with private holdings. The fund is about 30 percent deployed.

Graves said the firm would now turn its attention to the private side. “Today, our backlog in the private market is stronger than it’s ever been,” he said.

“We have a broad variety of industry exposures in the fund and also a broad variety of correlations with what we’ll call ground zero of the pandemic,” Graves said. “In places where we are investing very close to the pandemic – travel, leisure, things of that nature –we are generally making sure we are secured and high-up in the capital structure to mitigate risk.”

Graves expected the fund to be 40 percent to 50 percent deployed by September 30. It is on pace to be fully deployed a year later, one year faster than the usual three-year investment period in Ares funds.

Graves joined Ares in 2017 from Oaktree Capital Management. He runs this strategy with Craig Snyder, a veteran of Blackstone‘s GSO platform, and Citibank veteran Aaron Rosen. In total, 17 professionals work on the Special Opportunities team.

The Special Opportunities strategy grew out of the Ares Special Situations fund series. The last fund in that strategy, the 2017 vintage Ares Special Situations Fund IV, had an 11.6 percent gross IRR and a 1.1x multiple as of December 31, 2019, according to Hamilton Lane. Ares declined to specify how exactly the strategy had changed between Fund IV and the first Special Opportunities fund.

This is not the only Ares fund series to be re-tooled recently. The firm is also raising its first Ares Pathfinder fund, which is a re-booted version of its previous asset-backed lending fund series. That fund is targeting $2 billion, as Buyouts reported.

Earlier Thursday, Ares announced it closed about $2.7 billion in commitments across 40 transactions in the first quarter of 2020. In January, Ares president Michael Arougheti said the firm would have several funds on the market this year. The firm has $149 billion in assets under management, including $110 billion in credit and $25 billion in private equity.

Ares declined to comment for this story.

Action Item: read Ares Management’s form ADV here.