The growing global private debt opportunity
As Teiki Benveniste likes to put it: “Ares Management is one of the largest asset managers you’ve never heard of.”
Ares has around US$360 billion in assets under management as of 31 March 2023, operating as a global alternative investment manager. Benveniste is head of the wealth solutions business in Australia.
“Ares started in credit with syndicated loans, high yield bonds, and CLOs and then we were really oneof the early entrants in the US direct lending market in 2004,” Benveniste explains.
“We manage the largest publicly traded business development company in the U.S., which is funding middle and upper middle market companies. In 2007, we started our direct lending business in Europe and today we are one of the largest direct lenders in the region.”
Ares operates an integrated platform offering primary and secondary investment solutions across credit, private equity, real assets and infrastructure.
Founded in 1997and listed on the New York Stock Exchange with around 2600 employees, Ares uses the power of a broad and scaled platform to source investment opportunities across the liquidity spectrum.
But at its core is credit.
“The historical providers of capital to middle market companies in the U.S. are commercial banks, but you’ve seen incredible consolidation of banks in the U.S. over the last 50 years,” Benveniste says.
“About 50 percent have disappeared and you are still seeing that trend happening today with the U.S. regional bank disruption earlier this year. The trend is continuing.”
In Ares view there’s another reason why the more traditional source of capital for middle market companies has dried up: regulation.
“Regulation on banks has made it harder for them to lend capital to those corporates. It can be more costly and it’s not always economical,” Benveniste says. “So they’re retreating from lending to those middle market companies.”
The other piece of the puzzle for Ares, is that public credit loan markets are focusing on bigger companies. In the high yield bond market at the beginning of 2004, about 40 percent of deals were financing corporates with tranches of $300 million EBITDA or less, Benveniste says. Today that’s less than two percent of the market.
“Effectively, if you do not have $100 million of EBITDA as a corporate, it is very hard to access public credit markets.”
It provides an opportunity for Ares.
“We can lend to businesses that we feel are strong, growing and we can do it on relatively lender friendly terms when compared to the public markets. As a result, private credit assets have been resilient in periods of market volatility, but also provide excess yields relative to public credit.” he says.
“Specific to Ares Diversified Credit Strategy, we are in a position where we can create an investment solution that gives you access to self-originated private assets that are illiquid, that generally you would need to access in a closed ended format, and marry that with liquid assets, such as syndicated loans and high yield bonds to provide some level of liquidity.”
“It means we are marrying asset classes that have very low interest rate duration risk, because most of the assets are floating rate or in the case of high yield bonds, have short maturities,” Benveniste says.
“Most assets in the portfolio are senior secured, so they’re higher up in the capital structure. The portfolio is comprised of higher yielding credit assets. In the case of direct lending, a core allocation of the portfolio, that yield profile is enhanced by additional economics through origination fees.”
“By self-originating a loan, Ares may benefit from economics normally reserved for a bank, and can pass those economics on for the benefit of the investor. Combined with additional credit margin relative to public credit, that’s how you can work to achieve attractive risk-adjusted returns across cycles. We also believe there’s greater downside protection1 with lower volatility in self-originated
private assets and believe the ability to dynamically rotate the portfolio to take advantage of dislocations in public credit instruments is critical.”
Benveniste says over many years, Ares has been able to develop infrastructure that allows it to consider as many deals as possible in the market.
“On average, we only do about four percent of what we see, so we say ‘no’ to 96 per cent. We are incredibly selective. At the end of the day, this is credit and we believe the way you outperform is not by taking excess risk, but by clipping your coupon and getting your principal at the end.”
“You have to make as few mistakes as possible. Specific to our U.S. direct lending platform, since 2004 Ares on average has had 10 basis points of defaults a year for senior secured loans. And on those defaults, we had a 0% loss rate,” Benveniste says.
“When you look at high yield bonds and syndicated loans, it’s a similar story. We generate about a third to a quarter of the defaults of the broader high yield bond and bank loan markets.”
When you invest with Ares, you’re really investing with our security selection, our origination capabilities and our ability to minimise defaults and losses.”
1 References to downside protection are not guarantees against loss of investment capital or value.
This material has been prepared by Ares Australia Management Pty Ltd ABN 51 636 490 732 AFSL 537666 (AAM), and is current as at the date of publication. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. Neither any particular rate of return nor capital invested are guaranteed. No reliance: This publication is provided to you on the basis that it should not be relied upon for any purpose other than information and discussion. The publication has not been independently verified. None of Ares, Fidante Partners Limited, Ares Australia Management Pty Ltd, nor any of their respective related bodies corporates, associates and employees, make any republications, warranty or undertaking (express or implied) and accepts no responsibility for the adequacy, accuracy, completeness or reasonableness of the publication or as to the performance of any product. The information contained in the publication does not purport to be complete and is subject to change. No reliance may be placed for any purpose on the publication or its accuracy, fairness, correctness or completeness. None of Ares, Fidante Partners Limited, Ares Australia Management Pty Ltd, nor any of their respective related bodies corporates, associates and employees shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of the publication or otherwise in connection with the publication. Any forward-looking statements in this publication: are made as of the date of such statements; are not guarantees of future performance; and are subject to numerous assumptions, risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Ares undertakes no obligation to update such statements. Past performance is not a reliable indicator of future performance. Confidentiality and intellectual property: This publication is confidential and may not be copied, reproduced or redistributed, directly or indirectly, in whole or in part, to any other person in any manner. Risk: no person guarantees the performance of, or rate of return from, any product or strategy relating to this publication, nor the repayment of capital in relation to an investment in such product or strategy. An investment in any such product or strategy is not a deposit with, nor another liability of, Ares, Fidante Partners Limited, Ares Australia Management Pty Ltd nor any of their respective related bodies corporates, associates or employees. Investment in any product or strategy relating to this publication is subject to investment risks, including possible delays in repayment and loss of income and capital invested.