One way to navigate trade-induced volatility is to avoid it altogether
Ares reveals how focusing on the US mid market and leaning on its experience has helped it largely avoid the trade-induced volatility.
Despite the announcement over the weekend of progress in trade talks between China and the US, there is no doubt that the tariff escalation has had a negative impact on international trade, supply chains, and product sales – even if the threat of empty shelves has yet to materialise.
So, how can investors avoid the negative consequences of the trade war?
One way is to avoid investing in businesses exposed to those outcomes. Private credit firm Ares Investment Management, via its Ares Diversified Credit Fund, focuses on the US middle market – that meaty third of the US economy’s revenue, which features companies larger than small businesses but smaller than big businesses. These companies typically generate revenue between US$10 million and US$1 billion.
A fortunate happenstance of lending to such businesses is that they are “generally less exposed to international trade and the direct impact of tariffs”, says Ares’ Michael Smith, Partner and Co-Head of the Ares Credit Group. Furthermore, Ares focuses on “lending to US middle market companies, which are generally less exposed to international trade and the direct impact of tariffs”.
Finally, according to Smith, Ares prefers “non-cyclical, service-based businesses that are not reliant on product sales.” When it does lend to companies that rely more on revenue from product sales, Ares looks for diversified supply chains and geographic revenue streams so as not to be overly dependent on any one country for supplies or sales.
These factors have meant that “the fundamental performance in our portfolios in the US and around the globe is still attractive, with portfolio companies generally exhibiting positive cash flow growth,” says Smith.
In the following wire, Smith further unpacks how the Ares team have been navigating the volatility and investing accordingly.
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Targeting the middle: A $10 trillion opportunity
The US middle market, comprising roughly 200,000 companies with over 100 employees, represents approximately one-third of the U.S. economy.
“Collectively, they represent the same output as Germany or Japan,” notes Smith.
These companies are predominantly private and often fall below the radar of traditional lenders and public markets, creating a significant and largely untapped lending opportunity.
Ares has long focused on this “sweet spot” for private credit. According to Smith, “our US Direct Lending franchise has historically been a leader in lending to these types of private companies across various segments of the market.”
Why middle market lending makes sense
The appeal of middle market direct lending lies in its risk-adjusted return profile and structural advantages.
“The opportunity exists because of systemic shifts where bank retrenchment, regulation, and public markets focusing on larger companies have created a ‘funding gap’ that private capital is filling,” Smith explains.
Larger companies typically attract big-ticket financing from banks and institutional lenders. In contrast, smaller middle-market firms require a more hands-on approach, often involving numerous smaller deals. While this adds operational complexity, Smith believes the trade-off is worth it.
“Despite the greater work required to lend to smaller companies, there is typically a payoff in the form of more favourable spreads, better incumbency and ability to scale businesses as they grow over time,” he says.
Scaling with the market
As private markets mature and competition intensifies, maintaining an edge depends on flexibility and scale. Ares leverages its size and reach to shift focus across market segments as conditions change.
“When banks are very active, upper middle market may be less attractive… In times of public market volatility, those same companies are ready to accept more lender-friendly terms,” Smith explains.
This adaptability is key to sustaining performance across cycles.
“That’s why we believe direct lenders with a scaled platform and experienced teams can source and originate loans across all segments… and are best positioned to provide the strongest performance,” he says.
Are returns sustainable?
With private credit yields ranging from 8% to 12% over the past two decades, investors are understandably curious whether these returns can continue. Smith is confident they can.
“Private lenders have historically charged a premium or spread to traded bank loans, ranging from 200–400bps depending on the market environment,” he says.
He emphasises that performance in private credit is primarily driven by income and disciplined underwriting.
“We believe direct lending returns are anchored in those high single-digit to low double-digit yields as current income, combined with a sharp focus on loss avoidance, are the main drivers of returns for the asset class,” Smith concludes.
In a market increasingly shaped by uncertainty, Ares’ disciplined approach to private credit, backed by scale, experience, and a focus on resilient US middle market borrowers, offers investors a potential haven of stability and steady income.
Rather than hindering activity, market volatility often enhances Ares’ ability to deploy capital.
“Historically, the greatest growth in our AUM, management fees, and profit took place during the GFC and COVID,” he adds, pointing to the firm’s track record of thriving in challenging periods.
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REF: AAM-00647
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My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...
Expertise
My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...
Expertise
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