ARES (ARES) Q2 2023: Available Capital Rises 33%, Fueling Private Credit Expansion

August 1, 2023 | By EarningsIQ Research

ARES’ available capital for deployment climbed 33% year-to-date, intensifying its capacity to seize private credit and alternative lending opportunities as banks retrench. Fundraising momentum and margin expansion signal durable growth levers, while disciplined portfolio quality management keeps risk in check. Investors should watch for further acceleration as deployment speeds up and new platforms scale globally.

Summary

• Capital Base Expansion: ARES’ dry powder surge positions it to capitalize on bank pullbacks and private credit demand.
• Margin Acceleration: Operating leverage and scale in credit are driving steady margin expansion despite volatile markets.
• Strategic Globalization: New Asia-Pacific capabilities and wealth channel initiatives broaden the earnings runway.

Business Overview

ARES Management is a global alternative asset manager specializing in credit, private equity, real estate, and strategic investments. The firm earns revenue primarily through management fees on assets under management (AUM), performance fees (carry), and ancillary services. Its business segments include Credit (private direct lending, alternative credit), Private Equity, Real Estate, and affiliated Insurance, with a growing focus on wealth management and international markets.

Performance Analysis

ARES delivered broad-based growth across management fees, fee-related earnings (FRE), and realized income, with each metric up at least 20% year-over-year. Management fees rose 18% YoY, driven by deployment in credit and robust fundraising. FRE margin improved to 40.8%, reflecting scale benefits and disciplined hiring. Notably, net accrued performance receivables increased 8.8% sequentially, underpinned by higher interest rates and resilient credit portfolios.

Fundraising remained a clear strength, with over $31 billion raised in the first half and $7.3 billion more so far in Q3, spanning flagship private credit, alternative credit, real estate, and infrastructure vehicles. The pipeline of capital not yet deployed (AUM not yet paying fees) reached $55.6 billion, up 33% year-to-date, laying the foundation for future fee growth. Deployment accelerated 17% sequentially, led by private credit strategies, while portfolio quality stayed robust with non-accruals and defaults well below historical averages.

• Fee Momentum: Management fees and FRE outpaced transaction volumes, highlighting the resilience of ARES’ recurring revenue model.
• Deployment Tailwind: Private credit and alternative credit led the capital deployment rebound, with U.S. direct lending and asset-backed finance as standouts.
• Portfolio Quality: Credit fundamentals remained strong, supported by low loan-to-value ratios and sponsor equity support.

ARES’ ability to grow fee revenue and margins through market cycles, while building a larger pool of uncalled capital, signals a business model built for sustained compounding—even as traditional banks retreat from lending.

Executive Commentary

Strategic Positioning

1. Private Credit Scale and Bank Dislocation

ARES’ private credit platform is capitalizing on the retreat of traditional banks, especially regional players, by acquiring loan portfolios (e.g., PacWest) and deepening relationships with borrowers. The firm’s scale—$28 billion AUM in alternative credit and over 65 professionals—enables it to offer solutions at a size and flexibility unmatched by most peers. This positions ARES to further consolidate market share as banks face regulatory and capital constraints.

2. Fundraising Engine and Fee Growth Visibility

ARES’ fundraising engine continues to outperform, with multiple flagship funds either exceeding or tracking toward hard caps. The pipeline includes European direct lending, alternative credit, infrastructure, and perpetual capital vehicles. The $55.6 billion in not-yet-fee-paying AUM represents future management fee upside, providing strong visibility on organic earnings growth.

3. Wealth and Insurance Channel Expansion

Strategic investments in wealth management and insurance are diversifying ARES’ investor base, with new non-traded REITs, BDCs, and annuity platforms gaining traction. The launch of Access Aries, a digital platform for the wealth channel, and global product expansion into Europe and APAC, signal a push for retail capital and recurring inflows. The affiliated insurance segment (Espida) is scaling rapidly, with AUM nearing $10 billion and management fees nearly tripling YoY.

4. International Growth and Product Breadth

The acquisition of Crescent Point Capital and minority stake in Blue Cove extend ARES’ reach across Asia-Pacific and systematic credit. Crescent Point brings $3.8 billion AUM and deepens private equity and credit capabilities in Asia, particularly India and Southeast Asia. These moves support ARES’ ambition to replicate its U.S. and European model globally and create cross-asset sourcing synergies.

5. Operating Leverage and Margin Expansion

Scale in credit and disciplined hiring are driving FRE margin improvement, with a path toward 45%+ by 2025. The business model’s asset-light nature and recurring fee streams provide resilience and operating leverage, even in lower transaction environments. Management expects margin expansion to accelerate as deployment catches up with fundraising.

Key Considerations

ARES’ Q2 results highlight the firm’s ability to compound earnings and fee revenue, even as traditional capital markets remain subdued. The interplay of fundraising, deployment, and disciplined cost structure is creating a virtuous cycle of growth and margin expansion.

Key Considerations:

• Private Credit Demand Surge: Bank retrenchment is fueling durable demand for ARES’ direct lending and asset-backed finance products.
• Fee Growth Pipeline: The $55.6 billion in not-yet-fee-paying AUM offers embedded management fee upside as capital is deployed.
• Portfolio Resilience: Low non-accruals and high sponsor equity support limit credit risk, even as interest coverage softens industry-wide.
• Global and Retail Expansion: Asia-Pacific buildout and wealth management initiatives diversify growth levers and investor base.
• Margin Trajectory: FRE margin expansion is on track, but pace depends on deployment speed and fundraising conversion.

Risks

While ARES’ portfolio quality remains strong, the firm acknowledges that higher rates and lagged economic effects could push defaults higher, though with less severity than past cycles due to greater equity subordination. Deployment speed is a key variable— delays in capital deployment could defer management fee recognition and slow margin expansion. Global expansion brings integration and regulatory risks, particularly in less mature Asian markets. The industry’s rising competition and potential regulatory scrutiny of private credit also warrant attention.

Forward Outlook

For Q3 2023, ARES guided to:

• Continued fundraising momentum with several large fund closings expected in credit, real estate, and infrastructure.
• Further acceleration in deployment, especially in private credit and alternative credit strategies.

For full-year 2023, management maintained guidance:

• Fundraising to surpass 2022’s $57 billion total.
• FRE margin expansion, targeting a 45%+ run-rate by end of 2025.

Management cited robust demand for private credit, a growing pipeline of fee-paying assets, and ongoing expansion in Asia-Pacific and wealth channels as key tailwinds for the remainder of the year.

• Large capital base and client relationships support future deployment visibility.
• Margin expansion expected to accelerate as fundraising converts to deployment.

Takeaways

ARES’ Q2 performance underscores its position as a scaled winner in private credit and alternative assets, with a business model built for resilience and compounding.

• Capital Positioning: The 33% increase in available capital for deployment is a high-conviction signal for future fee and earnings growth as the firm capitalizes on bank retrenchment and market dislocation.
• Strategic Diversification: Global expansion and wealth channel initiatives are broadening ARES’ opportunity set beyond institutional capital, supporting a multi-decade growth runway.
• Investor Watchpoint: Track deployment velocity and conversion of not-yet-fee-paying AUM, as these will determine the pace of margin expansion and earnings compounding in the coming quarters.

Conclusion

ARES enters the back half of 2023 with a record capital base, visible fee growth pipeline, and expanding global reach. The firm’s ability to scale private credit, maintain portfolio resilience, and execute on new platforms positions it as a structural beneficiary of shifting capital markets dynamics.

Industry Read-Through

ARES’ results reaffirm the secular shift of lending activity from traditional banks to private credit managers, especially as regulatory and capital constraints tighten for banks. The firm’s fundraising and deployment momentum signal continued market share gains for scaled platforms, with asset-backed finance and direct lending as key growth vectors. Other asset managers and alternative credit firms can expect increased competition for institutional and retail capital, while banks may face further disintermediation in middle-market and specialty lending. Wealth channel expansion and digital distribution are likely to be industry-wide priorities, as managers seek to tap new sources of recurring capital. The Asia-Pacific buildout highlights the long-term opportunity for global players as private markets mature in new geographies.

ARES Financials Asset Management Private Credit Fundraising Fee Revenue Margin Expansion Asia-Pacific