The coronavirus market disruption hastened on a long-term trend in the private equity industry, wherein investors consolidate their relationships with their most trusted managers, the chief executive officer and president of Ares Management Michael Arougheti said on a Wednesday earnings call.
“Unlike in the liquid market, where size can sometimes hurt performance, in alternatives, based on the way that we go about the business, we have found that the larger we get, the more we can invest in competitive advantages and the better our performance is,” he said.
Ares, which managed $179.2 billion as of September 30, has been able to depend on its diverse strategies and products to weather the storm, while smaller firms have struggled.
“We hear anecdotally that the smaller single-asset managers are actually having a very challenging time raising capital in the work-from-home environment, juxtapose that with us and our larger peers who are all I think enjoying very significant success across multiple products,” Arougheti said.
Now, Ares is pivoting back into the private buyout markets after spending the middle part of 2020 focusing mostly on rescue capital.
“We are starting to see a significant pickup in M&A transaction activity in both North America and Europe, which we expect will create a healthy backdrop for both deployment and monetization,” he said on the call.
Arougheti said the crisis had gone through three distinct phases, all of which Ares has been able to take advantage of. First, the liquid markets were not functioning well and Ares invested mostly in “liquid distress.”
Next came rescue capital opportunities, or “high-quality assets with bad balance sheets or high-quality balance sheets in decent-quality asset pools,” which Ares is still working on. But now, capital is beginning to come off the sidelines as the market heals, with more traditional buyout deal flow returning. Arougheti called this the “sweet spot.”
“You still have people who are poorly capitalized, so the distressed opportunity does not go away, but you now have the opportunity to pick and choose,” he said. “So we’re pretty optimistic about deployment and monetization going into the end of the year and early into 2021.”
Ares saw record fundraising during the third quarter, bringing in $12.7 billion across several platforms. It closed on $3.7 billion for its sixth flagship private equity fund, on the way to a $9.25 billion target, and plans another close before the end of the year and a final close in the first half of 2021.
It brought in more than €7 billion ($8.2 billion) for its fifth European direct lending fund. It closed on $3 billion across three other credit strategies, including its alternative credit, liquid credit and US direct lending funds.
Action Item: check out Ares Management’s third quarter earnings presentation here.
Correction: A previous version of this article said Ares spent the middle part of 2021 focusing mostly on rescue capital. It is the middle part of 2020. The article has been updated.