Initially when broader market issuance and M&A activity slowed meaningfully in the first half of 2020, Ares Management’s global direct lending team was able to leverage its scale and deep relationships to selectively source, evaluate and invest in new deal opportunities to generate attractive risk-adjusted returns for investors. For example, deal activity following the pandemic outbreak generally offered incremental spread, enhanced fees, tighter credit agreement documentation, increased call protection and lower leverage.
Mitchell Goldstein, Partner and Co-Head of the Ares Credit Group, says: “While activity was more subdued during the first couple of quarters of the coronavirus pandemic, activity has increased meaningfully over the last 12 months, resulting in some of the busiest origination quarters ever.”
Ares’ global direct lending strategy, which has a team spanning the US, Europe and Asia, has built a strong track record of generating attractive risk-adjusted returns while minimising losses over its history. The team expects to continue to utilise a consistent, cycle-tested approach, with a prime focus on constructing diversified portfolios based on the belief that credit selection, sector avoidance and lead positions are paramount to help mitigate risk and develop defensive investment portfolios that can withstand economic and market shocks.
Direct lending
In terms of key trends, Goldstein notes that direct lending has further established itself as an attractive asset class among institutional investors over the last decade. He says: “We believe that investors are increasingly allocating capital to the space given the asset class’s ability to generate attractive risk-adjusted returns in primarily floating rate assets, that deliver a yield premium with lower volatility, compared to other similar fixed income alternatives.”
Increased appetite for the asset class is evidenced by the aggregate direct lending capital raised in the United States in October 2021 year to date period, which already exceeds the total amount raised throughout 2019 by 50 per cent, according to Preqin. The continued growth of the direct lending market can be explained by a long‐term shift toward private capital, as banks and public markets have transitioned from serving small and medium‐sized companies to larger companies.
Increased M&A
More broadly speaking, Ares continues to see a significant level of private equity dry powder globally, which has led to increased M&A activity and larger transactions sizes, with private equity firms writing significant equity checks into larger companies. “Increasingly large, mega transactions are coming back to the market, with four out of 10 of the largest LBO transactions following the Great Financial Crisis having closed since 2020, according to LCD,” says Goldstein. This has led to the advent of larger equity cushions, which further enhance the attractiveness of the risk-adjusted returns in the direct lending asset class.
Looking to the future, Goldstein says: “Ares’ global direct lending strategy will continue to leverage its size scale, and global presence to establish new relationships with sponsors and small, medium, and large-sized portfolio companies. Furthermore, we have seen an increasing convergence between the direct lending and broadly syndicated loan markets, providing further opportunity to grow with our existing portfolio companies as they scale to larger and more globally diversified borrowers.” 
Mitchell Goldstein, Partner and Co-Head, Ares Credit Group
Mitchell Goldstein is a Partner and Co-Head of the Ares Credit Group. He serves on the Ares Executive Management Committee. He additionally serves as Co-President of ARCC and Vice President and interested trustee of CION Ares Diversified Credit Fund. He is a member of the Ares Credit Group’s US Direct Lending, Pathfinder Fund, Pathfinder Core Fund and Commercial Finance Investment Committees and the Ivy Hill Asset Management Investment Committee. Prior to joining Ares Management in May 2005, Goldstein worked at Credit Suisse First Boston, where he was a Managing Director in the Financial Sponsors Group.
