Ares is built for turbulent times ahead, CEO says

Ares Management Corp. CEO Michael Arougheti said the firm continued its "strong growth" across all key financial metrics during the first quarter, despite a seasonal slowdown in transactions and the "uncertainty and volatility" created by inflation, rising interest rates, war in Ukraine and lockdowns in China.

"We have a demonstrated track record during volatile markets, and we've generated some of our fastest AUM and management fee growth through periods like the Great Financial Crisis and the recent COVID pandemic. For these reasons we remain confident in our growth trajectory, including our long-term AUM forecast of $500 billion or more by year-end 2025," Arougheti said on an April 28 earnings call.

Assets under management stood at $325 billion at the quarter's end, up 57% from the $207.2 billion in AUM that Ares reported for the same quarter a year ago.

Roughly $8.2 billion in new AUM is attributable to the firm's acquisition of AMP Ltd.'s infrastructure debt platform, a deal first announced in December 2021. The transaction closed in February, and Arougheti said Ares is now "uniquely positioned to meet the need for capital" in the infrastructure space because its diverse credit solutions are tailored to different industries and geographies.

"We believe that infrastructure needs globally will be significant in the coming decade, driven by population and economic growth, increasing privatization of infrastructure assets, the global energy transition and the shift to sustainable and digital infrastructure," the CEO said.

Fundraising outlook

Having just set its second consecutive annual fundraising record last quarter, Ares reported $13.2 billion in net new capital inflows for the first quarter, an increase of nearly 31% over the $10.1 billion it raised from investors in the first quarter of 2021. Just $600 million in new capital was directed to the firm's private equity group. Ares' credit business reaped the largest share of the new capital raised during the quarter, bringing in $6.7 billion.

Arougheti said the firm aims to bring 25 funds to market over the next 12 months, with several of Ares' "largest flagship funds" expected to launch in late 2022.

"We expect 2022 will be a solid year of fundraising, but the timing of these large flagship fundraises will ultimately dictate the final tally for this year versus next year and in relation to last year's record fundraising levels," he said.

Asked about lengthening private equity fundraising cycles — a line of inquiry analysts have pursued again and again this earnings season — Arougheti noted that its flagship buyout-focused private equity funds are not in the market and would not be until late 2022 or early 2023.

Arougheti said Ares was coming out on the winning side of an industry trend: limited partners' emphasis on re-upping and extending their relationships with a core set of fund managers, leaving some general partners out in the cold.

"I think that will benefit, again, the larger, more entrenched managers who have multiple products in the space."

M&A slowdown

Ares reported a record $92.4 billion in dry powder awaiting deployment in the firm's various investment strategies, up nearly 63% from the $56.8 billion in available capital it held this time last year. Private equity dry powder totaled $10.5 billion at the end of the first quarter, up more than 72% over the same period a year ago.

The firm invested $16.3 billion of its capital during the first quarter. Only a sliver of that went into its private equity strategies — $200 million, the smallest amount invested in any of its business lines over the quarter.

Arougheti described a slowdown in mergers and acquisitions, "particularly within the private equity space," but said first quarters tend to be "seasonally slow," noting that M&A activity was quiet early in 2021, too, before ramping up in the second half of the year.

"And at least as I'm sitting here, today, and looking at the shadow pipeline of deals building, the private equity community is actually starting to pick up activity now that we're getting a better look at what the new valuation environment is."

Rate hikes

The CEO expects "to see some valuation implication" in the firm's private equity portfolio from rising interest rates, noting that Ares would benefit from its relatively restrained use of leverage compared to similarly sized private equity firms.

"And given the rate of growth in those portfolios, that growth outpaces the value you give back. And that's been our experience so far," Arougheti added.