Ares launches first credit secondaries fund as firm eyes ‘record year’ for LP-led deals

Ares Management has launched its first credit secondaries commingled fund and expects to hold a first close on the vehicle this year.

The fund follows the official launch of its debt secondaries business in March via a joint venture with Gulf giant Mubadala Investment Company. The Los Angeles-headquartered firm said in a statement at that time it would initially deploy a roughly $1 billion pool of capital to buy LP stakes in credit funds and invest in credit-focused GP-led processes.

The joint venture “well positions us to be a market leader in the growing credit secondary sector, particularly due to our leading private credit franchise, knowledge, insights and relationships with middle market companies and sponsors”, chief executive Michael Arougheti said on the firm’s first quarter earnings call on Friday.

“We intend to further scale our presence in this new strategy with the recent launch of our first credit secondaries commingled fund, with a first close expected later this year.”

Credit secondaries is an area where legacy Landmark Partners hadn’t raised dedicated capital in the past. Arougheti said the fund “is another great example of the types of product extensions and growth that we can bring to acquired platforms shortly after acquisition”.

The launch comes as Ares is set to mark the two-year anniversary of its acquisition of Landmark, with the transaction closing in June 2021. Landmark has been fully integrated into Ares, and “retooled from a product perspective”. The firm is now working to “innovate and grow” the platform, Arougheti said.

Alongside the credit fund, the firm launched its non-traded, closed-end Ares Private Markets Fund, which invests in private assets acquired primarily on a secondary basis. The firm has “high hopes for the long-term growth opportunity” for that vehicle, Arougheti told listeners.

A ‘record year’ for LP-led secondaries

Ares’ optimism for secondaries is fuelled by capital constraint, illiquidity and the denominator effect, Arougheti said on the earnings call.

“We are seeing LPs seriously look at liquidity in the secondary market. I would expect that 2023 will likely be a record year for LP-led secondaries just based on what we’re seeing year-to-date and the way the pipeline is developing,” he said.

Pricing in the LP-led secondaries market is more attractive “than it’s been in a long time” Arougheti said, adding that average bids are sitting at 85 to 90 percent of net asset value for private equity and 70 to 75 percent of NAV for venture capital.

When it comes to GP-led activity, Arougheti anticipated continuation funds and NAV loan opportunities are going to “turn on in earnest”. Its pipeline is building as GPs are either in between fundraises or are experiencing slower capital raises for vehicles in market.

In ‘capital formation mode’

Ares is also in market raising real estate and infrastructure secondaries vehicles, with Arougheti stating the secondaries business is in “capital formation mode”.

Ares closed its latest private equity secondaries fund, Landmark Equity Partners XVII, below its target late last year on around $2.4 billion, Secondaries Investor reported. That vehicle was seeking $6 billion, according to Secondaries Investor data.

The firm is deploying that vehicle, which was raised during the acquisition and initial integration period, Arougheti said.