ARES (ARES) Q3 2023: Dry Powder Surges Past $100B, Extending Fee Growth Visibility
ARES crossed the $100 billion dry powder milestone, reinforcing multi-year management fee growth visibility and strategic flexibility. Fundraising momentum remains robust, with alternative credit and direct lending platforms expanding in both size and investor base. Management’s tone and deployment commentary underscore a structurally advantaged position as bank retrenchment and aging private equity assets unlock new opportunities into 2024.
Summary
- Dry Powder Reserves Expand: Record undeployed capital positions ARES for opportunistic fee and margin growth.
- Alternative Credit Demand Accelerates: Private credit and asset-backed finance capture investor flows and bank partnership opportunities.
- Strategic Growth Channels Scale: Wealth management and insurance channels deepen, broadening future fundraising and deployment levers.
Business Overview
ARES Management is a global alternative asset manager specializing in private credit, private equity, real assets, and alternative credit strategies. The firm generates revenue primarily through management fees on assets under management (AUM), performance-based incentive fees, and related fee income. Major segments include private credit (direct lending, alternative credit), private equity, real assets (real estate, infrastructure), and growing channels in insurance and wealth management.
Performance Analysis
ARES posted strong management fee and fee-related earnings (FRE) growth, underpinned by robust fundraising and deployment, particularly in private credit and alternative credit strategies. The firm ended the quarter with $395 billion in AUM and over $100 billion in dry powder, a record for the platform. Fee-paying AUM (FPAUM) also expanded, driven by new commitments and deployment across credit and real assets strategies. Management fees grew double digits year-over-year, reflecting both new capital formation and ongoing deployment activity.
Realizations remained light in Q3, as anticipated, due to the timing of European-style waterfall funds and overall muted transaction activity. However, ARES guided to a significant uptick in performance-related fee recognition in Q4 and into 2024, as fund maturities and refinancing activity increase. Margins improved modestly, with FRE margin reaching above 41 percent, and management reiterated confidence in achieving a 45 percent run-rate FRE margin by 2025. Notably, credit fund performance was a highlight, with all primary strategies delivering double-digit gross returns and low non-accruals, supported by favorable base rates and strong underwriting.
- Fundraising Momentum Broadens: $21.9 billion raised in Q3, second-highest ever, with $53.4 billion year-to-date, spanning flagship and new vehicles across credit, real assets, and infrastructure.
- Private Credit Franchise Scales: Direct lending AUM nears $118 billion, with U.S. and European funds both exceeding prior vintage sizes and strong investor demand for alternative credit strategies.
- Deployment Resiliency Holds: $16.7 billion invested in Q3, up sequentially, as opportunistic credit and rescue financings offset slowdowns in traditional M&A and real estate.
ARES’s multi-channel fundraising, disciplined deployment, and expanding alternative credit platform provide a stable base for recurring fee growth, even as realizations and exits remain cyclical.
Executive Commentary
"We raised $21.9 billion in new commitments in the quarter, our second highest fundraising quarter in the history of our firm, and we've now raised $53.4 billion through the end of the third quarter. We continue to benefit from our existing institutional investors who re-up or cross over into new ARIES fund products along with new investors who recognize our consistent fund performance and leadership in managing private assets."
Michael Arrighetti, Chief Executive Officer
"For the first time in our firm's history, we have over $100 billion in dry powder, of which over $65 billion is AUM not yet paying fees and available for future deployment. Upon deployment, this would generate nearly $650 million in incremental management fees and position us for continued FRE growth and margin efficiencies."
Jared Phillips, Chief Financial Officer
Strategic Positioning
1. Private Credit and Alternative Credit Leadership
ARES’s direct lending and alternative credit platforms are now among the largest globally, with the U.S. direct lending business at $118 billion AUM and European direct lending approaching €11 billion in new commitments. The alternative credit segment, including asset-backed finance (ABF, lending secured by non-traditional or illiquid collateral), has surpassed $32 billion in AUM, capturing market share as banks retrench and regulatory changes create new lending gaps.
2. Diversified Fundraising Engine
Fundraising is increasingly diversified across flagship, successor, and open-ended vehicles, as well as insurance and wealth management channels. The launch of new products, such as the non-traded BDC (ASIF, business development company) and European versions, is broadening investor access and driving incremental flows. Management highlighted the ability to scale vintage-over-vintage, raising floors for future capital formation.
3. Strategic Bank Partnerships and Inorganic Expansion
ARES is leveraging its scale and expertise to partner with banks on risk transfer and asset acquisition transactions, particularly in asset-backed finance and rescue lending. Recent deals, such as the PacWest portfolio purchase and a large strategic risk transfer, illustrate early innings of a $2 trillion opportunity in consumer and commercial loan portfolios. Inorganic moves, including the Crescent Point acquisition in Asia and Vinci Partners partnership in Latin America, further extend geographic reach and product breadth.
4. Wealth and Insurance Channel Build-Out
The firm’s insurance affiliate (Aspida, insurance platform) and global wealth management business are scaling, with Aspida AUM at $10.6 billion and a clear path to $25 billion by 2025. Wealth channel AUM continues to grow, with new product launches and expanded distribution partnerships set to accelerate flows, especially as private markets gain traction with retail and high-net-worth investors.
Key Considerations
ARES’s quarter reflects a structurally advantaged platform, with multiple levers for growth and risk management as traditional capital providers retreat and private market complexity rises.
Key Considerations:
- Dry Powder Deployment Optionality: Over $100 billion in undeployed capital provides both margin of safety and upside for future fee growth as market activity recovers.
- European Waterfall Fund Realization Timing: Performance fee recognition is extending into 2025, driven by slower refinancing and longer fund durations, but total potential realization continues to build.
- Credit Quality and Underwriting Discipline: Loan-to-value ratios remain conservative, non-accruals are below historical averages, and interest coverage is robust, supporting resilience in a higher-rate environment.
- Channel Diversification Mitigates Cyclicality: Insurance and wealth management flows offset institutional fundraising cyclicality, while product and geographic expansion reduce reliance on any one vertical.
Risks
Key risks include potential delays in deployment or realizations due to slow transaction markets, especially if refinancing activity remains muted or private equity exits stall. Real estate exposure faces headwinds from higher cap rates, which could limit incentive fee generation from non-traded REITs. Regulatory developments in insurance and wealth distribution may alter product economics or require enhanced disclosures, though ARES’s measured approach limits immediate exposure. Finally, competitive fee pressure in private credit, while not observed at ARES, bears watching as new entrants seek scale.
Forward Outlook
For Q4, ARES guided to:
- Significant fee-related performance revenue (FRPR) recognition, especially from credit funds, with $110-120 million expected.
- Approximately $45 million in European waterfall net realized performance income.
For full-year 2023, management expects:
- Total fundraising to exceed $65 billion, well above 2022 levels.
- Net realized performance income from European waterfall funds of ~$80 million in 2023, $160 million in 2024, and potentially $250 million in 2025.
Management highlighted several factors that support the outlook:
- Large pipeline of funds in market, with new closes expected across private equity, infrastructure, and credit.
- Secular tailwinds from bank retrenchment, aging private equity portfolios, and investor demand for alternatives.
Takeaways
ARES’s Q3 results reinforce the firm’s positioning as a scaled, diversified alternative asset manager with strong fee visibility and multiple growth levers.
- Fee Growth Visibility: Record dry powder and broad fundraising across strategies provide multi-year tailwinds for management fee and margin expansion.
- Private Credit and Alternative Credit Scale: Market leadership in direct lending and asset-backed finance positions ARES to capture flows as banks retrench and risk transfer accelerates.
- Deployment and Realization Watch: Investors should monitor the pace of deployment and realization activity, as timing will influence near-term earnings and performance fee recognition.
Conclusion
ARES exits Q3 with record capital to deploy, a robust fundraising engine, and a platform built to capitalize on structural shifts in private markets. The firm’s diversified channels and disciplined underwriting create resilience, while secular trends in alternative credit and global expansion offer outsized upside as market activity normalizes.
Industry Read-Through
ARES’s results and commentary signal that scaled alternative managers are consolidating market share as banks pull back and investors seek yield and diversification. The surge in dry powder and continued investor appetite for private credit and alternative credit suggest that fee-based growth will persist for leaders, even as realizations and exits remain cyclical. Wealth and insurance channels are becoming increasingly important distribution engines, with implications for product innovation and democratization across the industry. For asset managers and banks alike, the competitive landscape is shifting toward those with scale, flexibility, and multi-channel reach—smaller players and traditional lenders risk being left behind as the alternatives ecosystem matures.