Ares counts on incumbency, non-PE strategies if fundraising slows

In its Q1 earnings call, Ares said it closed a second special opportunities fund at a $6bn hard-cap and will later this year or early next launch a seventh flagship corporate PE fund.

Ares Management expects LPs concentrating more of their money with fewer GPs will ease its navigation of any fundraising challenges in the year ahead.

“We talk about an over-arching secular trend in our market which is the consolidation of share in the hands of the larger platforms across the alts landscape,” chief executive officer Michael Arougheti said in Ares’ first-quarter earnings call last week. “And that is continuing.”

Arougheti was responding to a query about private equity fundraising and the potential for extended timelines. It is a question being asked more often of GPs due to uncertainty, a crowded marketplace and the fact some LPs are over-allocated or facing cashflow constraints.

Ares, like other PE giants, may be less impacted by these factors because of growing LP selectivity. For reasons of efficiency, some investors prefer to manage a few incumbent relationships. Some also prefer to partner with big, brand-name firms with long track records and strategies covering a range of asset classes.

With this advantage, “folks like Ares are having a slightly different experience” relative to smaller or single-strategy managers, Arougheti said, “and I think that’s being reflected in fundraising”.

In Carlyle’s first-quarter earnings call, chief executive Kewsong Lee noted the “changing dynamics” in PE fundraising. This owes to “the record number of funds that are coming back to market much faster than LPs thought, in large part because of the success the private equity asset class has had over the last few years”.

The upshot, Lee said, will be “longer timeframes to traditional PE fundraising”, including for Carlyle’s offerings. He does not see the same thing happening in other areas, such as private credit, infrastructure and real estate.

Arougheti made the same point in Ares’ earnings call, saying the emphasis on re-ups will probably mean there are PE firms “who are not getting shelf space”. This, he added, will “benefit the larger, more entrenched managers who have multiple products”.

Launching Fund VII

Slower PE fundraising in 2022 will not immediately affect Ares, Arougheti said. That is because it took a second special opportunities fund “out of the market at the hard-cap”. In addition, he said there is no flagship corporate opportunities fund in the market, though the next is expected to roll out “toward the end of the year or early next year”.

Ares had not previously announced closing Ares Special Opportunities Fund II, which targeted $4 billion to invest debt and non-control equity in situations of transformational change or stress. The hard-cap was $6 billion, affiliate publication Buyouts reported.

The forthcoming launch of Ares Corporate Opportunities Fund VII is also news. Arougheti said the timing depends on its predecessor’s deal pace, as Fund VI is about 50 percent invested.

The new offering’s target was not disclosed. The 2020-vintage Fund VI secured more than $5.7 billion, according to first-quarter materials, against a reported target of $9.25 billion. The prior 2017-vintage vehicle brought in more than $7.8 billion.

The corporate PE strategy makes control investments in mid-market businesses in consumer-retail, healthcare, industrial and service-tech sectors. Fund VI was as of March generating a net multiple of 1.1x and a net IRR of 37.7 percent.

Ares expects to have 25-plus offerings in the market over the next 12 months, Arougheti said, including Fund VII and several other large flagships. Like Carlyle’s Lee, he sees no slowdown in LP demand for non-PE strategies, such as private credit and real assets. Overall, he anticipates “a solid year of fundraising” in 2022.

The firm raised $13.7 billion in fresh capital in the first quarter, building on record inflows last year of nearly $77 billion. This helped to increase managed assets to $325 billion, up 57 percent from a year earlier.

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