But there could be some headwinds for the credit management industry, he said.
"Given the (interest) rate backdrop and the assumption that rates will stay higher for longer, I think you will see an uptick in defaults, but that's not necessarily a bad thing," Arougheti said.
He said there is a lot more equity in these investments with 42% or 48% loan to value. What's more, private lenders to private equity portfolio companies have the safeguard of the roughly $3.5 trillion in private equity "sitting at the bottom of a lot of these capital structures" with $2.1 trillion of private equity dry powder to protect value, he said.
Even when there is a nonaccrual, meaning the lender has not received an interest payment in 90 days or so, the borrowers are in better shape than in prior cycles in which companies were underperforming. The nonaccruals in the current cycle are "being driven by higher rates for some of the better performing companies that were able to access more leverage, and those are a lot easier to resolve," Arougheti said. "They're also the first places that capital coming in from the private equity sponsors" is used to protect the value of their investment.
He added that the industry nonaccrual rate is running higher than Ares' rate. But if interest rates stay higher for longer, defaults should tick up a little bit but will not return to historical levels, Arougheti said.
During a separate Feb. 7 earnings call of Ares' business development company, Ares Capital, Kort Schnabel, co-president, said nonaccruals ended 2023 at 1.3%, below the 1.7% at the end of 2022 and lower than Ares Management's 15-year historical average of 3%.
Ares Management reported that Ares Capital, which is part of its credit business, raised $3.8 billion in gross new capital in 2023. Ares Capital accounted for $10.9 billion of Ares Management's AUM as of Dec. 31, Ares Management reported.
Another potential headwind mentioned in the Ares Capital call is that "many more traditional lenders are now returning to the market and the syndicated loan and high-yield market seem to be finding their footing," said Kipp deVeer, a director and CEO of Ares Capital and a director and partner of Ares Management, heading up its credit business. However, 90% of leveraged buyouts in 2023 were financed by direct lenders rather than through banks or bank-led syndications, he said.
During Ares Management's earnings call, Arougheti said in response to an analyst's question that he wanted to clarify commentary made during the Ares Capital call, explaining that when market activity accelerates, banks will become more active, and the syndicated loan and the high-yield markets will open up "and the CLO machine will turn on," he said referring to collateralized loan obligations.
"That's not necessarily a bad thing because that means that transaction activity is picking up and there's an opportunity to drive higher volumes and higher fees," Arougheti said. Ares' credit business has a strong focus on the traditional middle market, he said. There are times when the loan market is closed and private credit managers can gain market share at the higher end of the middle market, he said.
"Then obviously when the markets heal, activity level picks up, but unlike some of our larger peers, we are not dependent on a transfer of market share from the liquid markets in order to continue to drive the growth and performance we've seen," Arougheti said. "I don't think that we're looking at a return to normal in the liquid markets as bad for Ares' credit business."
Also, Ares is one of the largest liquid credit managers and CLO managers as well, Arougheti added.
Ares Management's credit business, its largest, had $284.8 billion in AUM as of Dec. 31, up 6% from the end of the prior quarter and up 26% year over year. Of its total AUM at the end of the fourth quarter, $47.3 billion was in liquid credit as of Dec. 31.
Ares reported GAAP net income of $174 million in the fourth quarter and $474.3 million in all of 2023. By comparison, Ares had GAAP net income of $61.8 million for the third quarter and GAAP net income of $117.5 million in the fourth quarter of 2022.
