The Financial Times reports that the US "Investment Group" with $200bn of AUM in Private Credit funds will launch it's largest ever private credit fund with Ace 5, an €11bn fund which has completed it's fund raising and will start lending to borrowers, replacing the aparently much diminished banking credit provided historically but also seemingly displacing bond markets due to the desire of massive borrowers to only have one single creditor to negotiate with. The fund will have 180 investors (65 new) with 80% of the capital coming from existing investors. Including leverage the fund will have around €15bn of credit to deploy.
Ares is an interesting firm you may never have heard of, its grown a sustainable 39% in the last year, impressive during a Covid inspired recession and lockdown when banks have been reducing their overall credit profile. The group boasted of "...record quarterly deployment" in their press release reported in their conference calls as 60% higher YoY (ie, they're lending out more than ever) with COO Michael Mcferran reporting “With over $56 billion of available capital in flexible investment strategies, we are well positioned for continued growth as we continue to leverage the advantages of our expanding investment platform and global presence.”
These are staggering numbers from a firm you are unlikely to know much about given it operates in the shadows of a credit system which has already been subject to enormous expansion since governments across the world stepped into prop-up companies in their countries during the pandemic.
Private credit providers are not only stepping in, but taking over, able to raise larger quantities of credit for borrowers without those pesky internal limits and capital requirements that banks are subject to. Private credit providers can lend more, with complex terms and fewer limits. They can also leverage themselves via various mechnisms (CP issues, paper programs, repos, just to name a few) whereby the exposures effectively rebound back to the underlying banks and financial companies which are unwilling to provide the financing in the first place. What is fascinating about Ares is that they're playing across the capital structure, they have arms investing in distressed debt, private credit, private equity, listed equity, etc, etc. Each of which seems to have the ability to invest into the other.
Ares quote a $207bn AUM but a fee-paying AUM of $136bn, with $37bn of uncalled capital and $34bn of assets on which they don't appear to be earning any fees. These assets are likely assets invested in through other parts of the firm (ie, "captive" assets) which would not incur fees because they are effectively be charging themselves. The difference with these kinds of fees is that they don't really matter, it's the upside on the investments themselves which goes to the P&L and Ares wrote down $49mn in the first quarter relating to some historic fund holdings. That's a lot for a company which made $52mn PBT in the first quarter. However, as they say 30 minutes into their recent earnings conference call, 50% of their transaction flow is coming from their existing portfolio. I would need to check, but that sounds like they're primarily refinacing their own investments and loans. Maybe this is wrong.
Ares recently purchased Landmark, another manager you never heard of, but also received a $250mn investment from Sumitomo Mitsui, a Japanese banking group you probably have heard of. Landmark is a Private Equity firm which specializes in secondaries trading, effectively buying existing Private Equity assets from other private equity funds (or out of Special Situations credit into Private Equity funds). Sumitomo is an enormous Japanese banking group with a $2.25tn balance sheet and a lot of money to lend, current loan book stands at $811bn.
I've never waded through a company in such a brief period of time and come across something which so perfectly epitomises what is going on in the market. This firm is the next generation of private credit manager. It is investing throughout the credit structure, it has staggering quantities of capital at it's disposal. It can provide equity capital via it's PE business, it has a global reach and it's growing at a spectacular rate.
The downside for the investors and counterparties to these companies is that they have relatively minimal amounts of capital in their ownership structure, no access to central bank money and they will be limited by their own mandates and fund structures in what they're permitted to do with their deployable capital in the future. Provided the good times roll, these companies will likely be fine.
When the music stops, then we'll see what happens.
