Ares' private credit boss unpacks how its funds targets big yields and diversification from shares
Michael Smith Ares co-head of private credit says it targets yields between 8% and 10% while staying laser focused on risk.
The Private Credit Group of US-based asset manager Ares Management has around US$349 billion of assets under management (as at 31 December 2024), run on behalf of investors and its funds typically targets yields in a range between 8% and 10%.
On a recent trip to Australia, Michael Smith, Ares co-head of Private Credit said the ballooning investment class is gaining popularity as it's an excellent way for investors to diversify their exposure away from public share markets prone to significant downturns.
Private credit funds also offer the potential for consistently high income streams hard to find in the share market, according to Smith.
"So most of our products that we offer give a quarterly or monthly dividend to the investor," says Smith. "We go out, we find great borrowers who pay that interest to us. We collect it and pass it on to our investors on a quarterly basis typically."
Ares tends to lend to and invest in companies in the US and developed European markets.
Smith estimates there's more than 200,000 mid-sized companies in the US to mean 99% are of businesses are private, rather than traded on stock markets, and many are growing faster than their listed peers.
In turn these private companies often need access to capital to grow and this is where Ares and its lending or investment experience comes in, according to Smith.
He adds that regulation, among other issues, means mainstream banks have continued to pull back on lending to mid-sized businesses to leave a larger gap for private lenders like Ares to fill.
Moreover, the reluctance of the banks to lend means the demand from good quality corporate borrowers remains strong, which means Ares has a massive opportunity to meet the market and offer investors high yields on a solid risk-adjusted basis, according to Smith.
"The borrowers are desiring this type of credit, especially in the middle market where firms like Ares focus, those borrowers are dynamic businesses," says Smith.
"They are looking to do acquisitions, they're looking for capital to grow their business. So, being able to privately negotiate a transaction with a lender like Ares allows them to effectuate their corporate goals in a way that a bank traditionally doesn't let them."
Diversification and differentiation
In addition to the yields Ares' funds earn on their lending activities, the asset manager can also earn upfront origination fees and its massive scale allows its funds to be highly diversified across all levels of direct lending.
"At Ares, we focus very much on private equity backed companies," says Smith on how the asset manager differentiates itself in the private credit space.
"We've been active in these private credit markets for over 20 years, demonstrated an ability to originate our assets, to manage collateral, to deliver that yield to our investors.
"We're also part of a large global platform, I think which differentiates us and some others that are affiliated with these large global managers that deal with regulators and investors across the entire world spectrum. And we think that that's a super competitive advantage."
In total the sprawling US investment group has some US$527 billion in assets under management including across its real estate, infrastructure, and private equity investment groups.
To watch Smith explain more on how Ares offers private credit products to investors watch the above video.
Yield is an attribute of underlying investments and does not represent a return to investors.
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For further insights from the team at Ares Wealth Management Solutions, please visit their website.
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Tom covered markets as a Markets Reporter & Commentator at the Australian Financial Review for nearly five years. Prior to that he was the Managing Editor of The Motley Fool Australia leading a team of around 20 investment writers during a five-year period of massive online growth. Before that Tom worked in equities management at the Bank of New York Mellon in London and as a holder of professional investment qualification the Investment Management Certificate is eligible for membership of the CFA Society of the UK.
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Tom covered markets as a Markets Reporter & Commentator at the Australian Financial Review for nearly five years. Prior to that he was the Managing Editor of The Motley Fool Australia leading a team of around 20 investment writers during a...
Tom covered markets as a Markets Reporter & Commentator at the Australian Financial Review for nearly five years. Prior to that he was the Managing Editor of The Motley Fool Australia leading a team of around 20 investment writers during a...
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