Ares Management collected about $3.3 billion for a second vehicle earmarked for special opportunities investing, a strategy that is gaining traction among large private equity firms.
The fundraising was disclosed last month by Pennsylvania State Employees’ Retirement System. Ares Special Opportunities Fund II held a first close in October, the SERS documents said, and was looking to hold a second before the end of the year.
The $3.3 billion raised, which includes a GP commitment of $100 million, brings Fund II within reach of its $4 billion target. The latter was also disclosed in the SERS documents along with the offering’s hardcap, set by Ares at $6 billion.
Special opportunities is a fairly new niche category pioneered just over a decade ago by Blackstone. In the wake of the financial crisis, the PE giant launched a program called Tactical Opportunities to invest flexibly in white space opportunities not covered by its flagship funds.
Blackstone’s experience with Tactical Opportunities, today a $34 billion platform, encouraged other firms to develop comparable strategies. In addition to Ares, they include Apollo Global Management, Brookfield Asset Management, Sixth Street and TowerBrook Capital Partners.
While programs vary in emphasis, they often share key characteristics, such as a concentration on assets, markets and sectors beyond the scope of a firm’s existing funds. Other common features include the provision of tailored, non-control capital solutions, a focus on the middle of the capital structure and an all-weather approach to deal sourcing and investing.
“We created an asset class for what we do,” Tactical Opportunities founder David Blitzer said in an interview for “The wizards of opps,” Buyouts’ October cover story.
How Ares invests
Ares’ Special Opportunities was launched in 2017 by Scott Graves, a partner and co-head of the private equity group, who joined the same year following a career at Oaktree Capital Management. It was designed to provide bespoke debt and minority equity solutions to mid-market companies, filling the void between control PE and private credit, according to the SERS documents.
A significant aspect of the strategy is its focus on North American and European businesses undergoing transformational change or stress, in both good markets and bad.
“This is an all-weather product,” Graves said in Ares’ Investor Day 2021. “We invest in both stressed-distressed and over-levered companies – be it rescue, private market or public market – but we also invest in healthy companies, companies that need a higher-risk, higher-reward direct lender.”
This was illustrated through investing in the covid-19 market. In 2020, Special Opportunities’ primary interest in private opportunities was shifted to a mix of dealflow that gave more exposure to listed bargains. Then, as the market began to recover, it was adjusted again.
Companies backed in this period include outdoor advertiser Clear Channel Outdoor, telecom provider Frontier Communications, car rental business Hertz and thrift store chain Savers Value Village.
Solid track record
Ares closed its inaugural special opportunities fund in 2020 at $3.5 billion, ahead of a $2 billion target. As of mid-last year, the vehicle had accounted for roughly $4.1 billion in deployments, most of which flowed into private transactions.
Perhaps benefiting from pandemic-era investing, Ares Special Opportunities Fund I has generated robust results. Ares in its Investor Day 2021 reported a 67.9 percent gross IRR and a 52.2 percent net IRR for the fund as of June. Similar performance numbers were disclosed in the SERS documents.
Other senior members of Ares’ Special Opportunities team include partners and co-portfolio managers Aaron Rosen and Craig Snyder and partners Felix Bernshteyn and Matt Underwood.
Special opportunities funds now in the market are targeting more than $20 billion, Buyouts estimates. Along with Ares’ second offering, they include Apollo Hybrid Value Fund II, which is seeking $4 billion to $5 billion; Blackstone Tactical Opportunities Fund IV, which is seeking $4.5 billion; and Brookfield Special Investments Fund, which is seeking $5 billion.
Ares declined to provide a comment for this story.