Side Letter: Ares’ flagship flurry; PE’s marketing mix-up; LACERS’ deal pace

Ares appears confident of upsizing its next series of flagship funds by a similar proportion to previous iterations, despite congestion among LPs. Plus: why you might need to change how you market funds and LACERS has devised a novel solution for its time-sensitive investment decisions. Here's today's brief, for our valued subscribers only.

Just happened

Ares-on to be optimistic
Ares Management doesn’t appear too daunted by the fundraising crunch facing many of its peers this year. The firm plans to hit the market with a new flagship fundraising cycle in the latter half of 2022, including its seventh corporate private equity fund, sixth European direct lending fund and second closed-end alternative credit fund, as well as its third US junior capital direct lending fund next year, chief executive Michael Arougheti said on its Q2 earnings call on Thursday.

Ares has not yet felt the impact of LP capacity constraints due to the denominator effect, Arougheti said, noting that the firm raised $16.4 billion of gross commitments across more than 15 different funds, as well as SMAs, including more than $5 billion via perpetual capital vehicles in Q2 2022. Ares feels “very good” about its future fundraising pipeline and is optimistic around upsizing its funds by about 20 to 40 percent, in line with prior successor funds.

“That would be our hope,” Arougheti said. “If you look at the sequential growth of the prior vintages, it has been within that range if not better. I’m less focused on fund size and fund growth here because all those fund products actually pay on deployment.”

Here are some other highlights from the quarter:

  • PE AUM contracted slightly from $33.6 billion as of 31 March this year to $33.4 billion as of 30 June, though it was up from $26.9 billion year-on-year.
  • Ares had $9.6 billion of PE capital available to deploy as of 30 June, having deployed $1.9 billion into the asset class during Q2 2022.

Marketing on the mind
Fund managers have a lot on their minds in 2022, but one issue is giving compliance staff more sleepless nights than the rest, our colleagues at Private Funds CFO report (registration required). Nearly eight in 10 (78 percent) of compliance officers for at US investment advisers cited the Securities and Exchange Commission’s new marketing rule as the hottest topic this year, according to the 2022 Investment Management Compliance Testing Survey. This represents a 20 percentage-point jump on last year and saw the topic rank ahead of cybersecurity (66.9 percent) and ESG/sustainability (50.5 percent).

The new rule, which comes into play on 4 November, bans the use of hypothetical performance in marketing materials – except in limited circumstances – and standardises the calculation and presentation of performance, among other changes. It also withdraws many no-action letters that firms have historically relied on, in which entities that were unsure whether they have violated a law can request that the SEC examine their case in the hope that it will issue a letter promising to take no further action.

The bottom line is that various industry practices that are second nature to many could no longer be acceptable, or at the very least adapted to comply with the new rule. One example is the language that fundraising partners use when selling a GP’s fund. “There are partners who love speaking about [our global fund] and have a certain way they love to advertise or speak with prospects about the fund,” said one PE CCO at PEI’s Private Fund Compliance Forum in May. “And it can be challenging to say that this framework that you know and love, and these terms you’ve always used… we have to change them now.”


LACERS’ pace
The Los Angeles City Employees’ Retirement System has proposed a policy for investment staff to back time-sensitive opportunities without board approval or a competitive bidding process, our colleagues at Buyouts report (registration required). The Unique Investment Opportunities Policy, which staff presented to the board on Tuesday, has two defining characteristics – a short window of time to capitalise on the opportunity and a short-term investment horizon, according to meeting materials. UIO investments can be made in public or private market investment strategies and implemented through separate accounts or open‐end or closed‐end commingled funds. For private markets investments, the commitment size of each investment may not exceed 0.5 percent of the total market value of LACERS’ portfolio.

LACERS’ proposed policy is a logical one: with rapid changes happening regularly in the current environment, LPs would not want to miss out on attractive deals. “There are opportunities to be found based on economic dislocation, capital shortages and other situations,” said LACERS investment officer James Wang during the meeting. “There could be extreme valuations and distressed players in the market or a broader structural change.”

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

4 August

Today’s letter was prepared by Alex Lynn with Rod JamesCarmela Mendoza and Madeleine Farman