AlternativesJuly 31, 2024

Ares Closes Largest Private Credit Fund

The $34 billion Ares Senior Direct Lending Fund III aims to lend to middle market companies.

Reported by Matt Toledo

Alternative investment manager Ares Management Corp. announced on Wednesday that it closed a $34 billion private credit fund, a record for the industry. Ares Senior Direct Lending III was oversubscribed with $15.3 billion in commitments, as the firm said it had aimed to raise $10 billion.

Additional equity commitments and anticipated leverage will raise the fund to about $33.6 billion, nearly double the size of its predecessor, SDL II, which had $14.9 billion in debt and equity commitments.

Senior Direct Lending Fund III would be the largest private debt fund raise ever. According to data from Preqin, some of the of the largest direct lending funds include Ares Management’s Ares Capital Europe IV, with a target size of $16.377 billion; Oaktree Capital Management’s Oaktree Lending Partners with a $10 billion target size; and Blackstone’s Blackstone Senior Direct Lending Fund with a target size of $10 billion. In May, Goldman Sachs Asset Management closed its West Street Loan Partners V fund, raising more than $20 billion.

The popularity of private credit has grown quickly, propelled by the yields the asset class offers, about 8.2% for the 12 months ending in the third quarter of 2023. The asset class attracted $1.75 trillion globally (mostly in the U.S.) as of mid-2023, tripling its size over 10 years, a PitchBook report indicated.

Many investors are increasing their allocations to the asset class. In March, the California Public Employees’ Retirement System approved a plan to increase its allocation to private debt to 8% from 5%, as part of a larger reallocation to private markets. The fund’s Sacramento neighbor, the California State Teachers’ Retirement System, in March approved a 2% allocation in its fixed-income portfolio to add private credit.

Ares has been raising the fund since 2023 and has received commitments from institutional investors including the Teachers’ Retirement System of Louisiana, the New Hampshire Retirement System, the Alameda County (California) Employees’ Retirement Association and the Maine Public Employees Retirement System.

According to an Ares spokesperson, the global investor base for its senior direct lending funds including public pension funds, insurance companies, sovereign wealth funds, investment managers, family offices, endowments, foundations, corporate pensions, high net worth individuals, private pensions and fund-of-funds.

The fund, like its predecessors, will make senior secured loans to North America-based middle market companies. Los Angeles based Ares is a colossal alternative investments manager, with $428 billion in assets under management across numerous alternative asset classes.

“The middle market continues to experience significant demand for reliable capital solutions, as it remains underserved by banks and other traditional lending sources,” said Mark Affolter, partner in and co-head of U.S. direct lending at Ares, in a statement. “Our extensive origination capability enables us to see a broad set of potential opportunities to lend to high-quality small, medium and large companies.”

According to Ares, the fund is already deploying capital and has committed $9 billion to more than 165 companies. SDL III will deploy the same strategy as its predecessor funds: It will provide capital to companies that generate from as low as $10 million to over $150 million in earnings before interest, taxes, depreciation and amortization in deals for which Ares will serve as the leading provider of capital.

“Ares seeks to invest in companies that maintain a strong competitive position in their respective markets with experienced management teams and strong free cash flow characteristics,” stated the fund’s press release.

Ares’ fundraising comes as defaults in the asset class are rising. In the second quarter of 2024, the default rate for private credit deals hit 2.71%, the third consecutive quarter that default levels have risen and the highest level since 2020, according to a study by Proskauer Rose LLP, the large international law firm that specializes in finance.

Earlier this year, JPMorgan Chase CEO Jamie Dimon called the asset class “young” and pointed out that it has not yet weathered a severe economic downturn, expressing skepticism about its resilience.

Still, investors continue to pour into private credit, and banks are getting in on the action too. Nomura, Barclays, Wells Fargo and Citi are among the banks throwing their hats in the private credit ring. J.P. Morgan Chase is also said to be eyeing an acquisition of a private credit firm to boost its asset management business.