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GP Profile: Debt specialist Ares returns with fifth PE fund

  • Year founded: 1997
  • Investment strategy: Buyouts, distressed debt, growth equity
  • Key executives: Co-heads of PE David Kaplan and Bennett Rosenthal
  • Office locations: 19 offices worldwide
  • AUM: $88 bln
  • Fundraising status: Raising Fund V with $6.5 bln target
  • Active portfolio companies: About 25
  • Website: http://www.aresmgmt.com/

Ares Management is back in the market with its first flagship private equity fund since its May 2014 initial public offering. The $88 billion asset management firm set a $6.5 billion target for Ares Corporate Opportunities Fund V, a $1.8 billion increase over the $4.7 billion it raised through its previous fund in 2012.

Early investors in Fund V include the New Mexico State Investment Council, which committed $100 million in September, and the Nebraska Investment Council, which committed $50 million to the fund, according to Nebraska CIO Michael Walden-Newman.

“They’ve grown [in size] a little bit with each subsequent fund,” said New Mexico spokesman Charles Wollmann. “We’re frequent flyers in that fund … They’ve done very well.”

Ares’ previous four private equity funds netted a cumulative internal rate of return of 17 percent and a 1.6x multiple, according to fund presentation documents made public by New Mexico. Ares Corporate Opportunities Fund III has been a particularly strong performer, netting a 23 percent IRR as of June 30.

Ares began marketing Fund V in the second quarter and will likely continue fundraising through the end of this year. The firm expects to hold a final close next year, Ares President and co-founder Michael Arougheti said on a second-quarter earnings call.

“We’re seeing significant early demand for this fund,” Arougheti said. “We’re very excited about our fundraising prospects for flagship funds and we expect that this will meaningfully improve our growth and earnings profile in the coming quarter.”

Flexible strategy

Unlike fellow asset managers such as Blackstone Group and Kohlberg Kravis Roberts, which are known for their buyout funds, Ares is mostly known as a credit and debt fund manager. Approximately 70 percent of its $88 billion of assets under management falls under its tradable credit and direct lending platforms.

Unsurprisingly, the firm’s $15 billion private equity business draws on the expertise Ares developed in distressed debt and credit strategies.

Ares Corporate Opportunities Fund V will invest in companies that fall into two categories: distressed balance sheet situations and traditional sponsorship situations, according to New Mexico documents.

The first category plays to the firm’s experience in credit and debt-related investments. The firm’s corporate opportunities funds can provide capital to companies that need to deleverage their balance sheets, which allows those businesses to allocate capital toward growth initiatives rather than interest payments. Ares can also invest in a company’s debt structure, which allows the firm to obtain control of a business by acquiring distressed debt at a discount, according to New Mexico materials.

The second category follows more traditional buyouts and equity investments, though Ares notes in the New Mexico presentation materials that it typically executes its buyouts with “moderate” leverage.

The result is a more “flexible” approach, according to an LP Capital Advisors memo included in New Mexico materials. The two-pronged approach enables Ares to invest its buyout funds from several different points in a company’s capital structure, which makes it easier to invest across investment cycles, Arougheti said during the earnings call.

“As market conditions and defaults and interest rate risk shift, we believe that our ability to move up and down the capital structure to manage risk and enhance returns has a meaningful advantage,” he said.

While Ares can invest across a wide range of industries, the firm typically focuses on consumer/retail, building products, services, energy, healthcare and industrials, according to the LP Capital memo.

An Ares spokesman did not respond to questions about Fund V.

Action Item: View Ares investment presentation here: http://bit.ly/1hHxm3l