Ares chief: SPACs will ‘chip away’ at private equity dealflow

Ares Management‘s co-founder and chief executive has said that special purpose acquisition companies could take more deal opportunities away from the private equity market.

Speaking on the firm’s fourth quarter 2020 earnings call on Thursday, Michael Arougheti said that while SPACs are an additive form of technology that supplement Ares’ approach to origination, their growth could affect dealflow for buyers across several asset classes and strategies.

“I do think that this will chip away a little bit at the aggregate market opportunity for PE when you just look at the amount of capital searching for transactions and candidly, it will also chip away a little bit on the venture side and the growth equity side as well,” Arougheti said.

It is important to appreciate that what makes a good leverage buyout candidate does not necessarily make a good SPAC candidate, and that what makes a great public growth company does not necessarily make a great private entity, he added.

“Clearly, the liquidity in the market is driving a lot of issuance and I think we’re going to see dispersion in performance over time the way that we’ve seen when new capital markets technologies come into the market,” he said.

Some 248 SPACs raised $83 billion at IPO last year, six times the sum raised across 59 vehicles the prior year, according to SPAC Data. More than $28 billion has been raised across 100 SPAC IPOs this year alone.

A confluence of events is pushing the SPAC phenomenon, sister title Buyouts reported last year. Tailwinds include strong equity markets; covid-19 shrinking if not eliminating, at least temporarily, the window for conventional IPOs; increasing familiarity with SPACs; and the allure caused by fear of missing out.

Private equity firms, including Apollo Global Management, TPG, Neuberger Berman and Thoma Bravo, are among those with SPACs of their own. Hamilton Lane is also planning a business line dedicated to SPACs, having raised $276 million for its debut vehicle this year.

Arougheti added that, similar to BDCs and mortgage real estate investment trusts, an abundance of different types of capital is a positive development.

“I think anytime that we see opportunities for increased capital formation for companies, that’s a good thing.”

The firm’s Ares Corporate Opportunities Fund VI has raised at least $4.1 billion of commitments and is “off to a great start” in terms of deployment, Arougheti said. The fund committed around $1.5 billion to new investments last year, half of which were in traditional investments and half in distressed opportunities.

Fund VI has a $9.25 billion target, according to PEI data.

Ares’ private equity group raised $6.2 billion last year, and this year the firm expects to raise more than the $41 billion raised in 2020 across all strategies, Arougheti said. The firm invested $5.3 billion last year, roughly equally split between traditional and distressed investments.

– Alex Lynn contributed to this report.

To access more Ares Management insights, analysis and data, click here