Ares Management, one of the dominant players in private credit, is now underwriting deals as large as $3 billion and could before long provide loans for as much as $5 billion to a single borrower, CEO Michael Arougheti said.
Private equity firms are increasingly bypassing syndicated loans arranged by banks and turning to direct lenders, usually at a higher cost. The reasons include speed of execution, confidentiality or a need for unconventional financing.
"It's accelerating," Mr. Arougheti said Wednesday in New York. "There are clear circumstances where the private markets, even though they're more expensive, offer a much better value proposition to the sponsors."
Ares, together with Blackstone, Apollo Global Management and Blue Owl Capital, is one of a small handful of direct lenders with the scale to challenge banks in financings for leveraged buyouts. It was the first, in 2016, to underwrite a so-called unitranche loan for more than $1 billion.
At $5 billion or less, borrowers are willing to pay extra for the flexibility of dealing with a direct lender, a premium Mr. Arougheti put at 50 to 100 basis points. Any more and the cost of syndicated bank credit is simply too cheap to pass up, even if takes longer and involves more complexity, he said.
Right now, the pandemic-driven boom in U.S. mergers is fueling demand for private debt financing. But Europe is fast catching up.
"Europe has historically been five or 10 years behind the U.S. market, but this large loan, large LBO trend is accelerating there as well," Mr. Arougheti said.
Institutional and — increasingly — retail investors are plowing money into direct-lending funds because they offer higher yields than corporate bonds or syndicated loans. Mr. Arougheti said Ares raised almost as much in the first half of the year as it did in all of 2020 and that demand has remained as strong since.
Earlier this year, Ares acquired Landmark Partners, a specialist in the buying and selling of limited partner fund stakes, and Black Creek Group's U.S. real estate business.
Mr. Arougheti predicted that the pace of consolidation among alternatives managers will continue picking up and said Ares intends to grow, in part via acquisition, in credit, real estate and infrastructure. Private equity, in which the firm has about $31 billion in assets under management, is less of a priority.
"Private equity: That's a great business. In my mind it's not a growth business," he said. "The investible market opportunity just isn't the same."
