Ares Management is getting its groove back.
The alternative investment firm's business development company, Ares Capital Corp., on Jan. 3 closed a deal to buy troubled BDC American Capital, adding $3 billion to Ares' U.S. credit unit's assets under management. The transaction will partially replenish a $5.7 billion drop in AUM in the final quarter of 2015 due to the loss of unfunded capital managed for General Electric Capital Corp. and GE Global Sponsor Finance.
This deal is a significant one for Los Angeles-based Ares Management.
By far Ares' biggest business is its $62 billion global credit group, accounting for 64% of the firm's $97.3 billion under management as of Sept. 30. Within credit, the largest segment is Ares' $22.6 billion U.S. direct lending business — made up of a combination of its BDC and institutional investor separately managed account assets.
When General Electric pulled out of corporate lending in the U.S. and Europe, it caused a $3.1 billion loss for Ares' direct lending business in the fourth quarter of 2015.
Credit managers live and die by the amount of capital they have at their disposal. The more capital, the larger the loans they can make and the more likely deal-making intermediaries will turn to them for financing. Bigger managers also get better terms and lower cost financing, which boost returns.
More capital also allows these managers to hold more of the loans they originate, earning returns in investors' portfolios, rather than having to sell them off right away to be syndicated into bonds.
The American Capital transaction is “transformational” for Ares Management, said Michael Arougheti, New York-based co-founder of Ares, a director and president of Ares Management, and co-chairman of Ares Capital's board of directors. “Our greater scale allows us to originate more and larger loans, hold greater amounts of these loans without sacrificing diversification, and it provides better access to the capital markets,” Mr. Arougheti said.
Ares Capital, already the largest traded BDC, last year led the origination of one of the largest loans arranged by a BDC, at $1 billion. Of that loan, Ares retained about $200 million on its books. The BDC also made an $8 million equity co-investment in the deal, the August buyout of visual analytics company Qlik by private equity firm Thoma Bravo LLC.
“It (the American Capital deal) allows us to do deals that may have been more common for a bank to do five years ago,” said Kipp deVeer, CEO of Ares Capital.
Ares Capital's acquisition of American Capital for $3.43 billion not only adds fee-earning assets to Ares Management's AUM, but it increases Ares' BDC total assets to $12.3 billion, a 35% hike from Sept. 30.
Private credit investors prize managers with larger pools of capital, consultants say.
“Credit managers with larger pools of capital tend to have greater security and access to ideas,” said David Fann, New York-based president and CEO of private equity consulting firm TorreyCove Capital Partners LLC.
Gaining assets from investors is particularly important because most BDCs — including Ares Capital — are trading below net asset value, according to a Jan. 3 report by Fitch Ratings Inc. This precludes them from accessing the equity markets for growth capital, the report noted.
Fitch Ratings on Jan. 4 affirmed Ares Capital Corp.'s debt rating at BBB with a stable outlook. n