In the alternative asset industry, attention naturally focuses on the biggest players, such as Blackstone (NYSE: BX), KKR (NYSE: KKR) and Apollo Global Management (NYSE: APO), who pound out profits.
But there are smaller contestants making waves too. One of them is Ares Management (NYSE: ARES), with assets under management of $596 billion (up 28% from a year ago) and a market capitalization of $39 billion. It’s big enough to enjoy the benefits of diversification and reasonable distribution costs for its funds. And it’s small enough to be nimble in its investment strategy.
Ares has posted total annualized returns of negative 1.1% for one year, 32.1% for five years and 32.6% for 10 years. That trails the S&P 500 return for one year and beats it for five and 10 years. Last year’s slip stemmed from investor and corporate uncertainty amid U.S. tariffs.
Institutional and individual investors are increasing their exposure to alternative assets – such as private equity, private credit, real estate and infrastructure. That creates opportunities for firms like Ares.
“We believe the secular shift toward private markets and wealth portfolios is still in its early innings,” Ares CEO Michael Arougheti said in the company’s Nov. 3 earnings conference call.
Breaking down the $596 billion in assets, 66% are in private credit, 22% in real estate and infrastructure, 6% in secondaries (investment-fund stakes that are bought and sold), 4% are in private equity, and the rest are in other businesses. Ares recently completed several large infrastructure investments, including two data centers in Virginia.
Pluses and minuses of private credit
Those numbers give Ares diversification, but the concentration in private credit may be problematic. These are loans to companies with weak finances. Investor demand has soared for them in recent years, thanks to their high interest rates – generally 7-12%. The private credit market now totals about $3 trillion.
But given the fragile status of the companies taking loans, private credit is a market that could easily stumble, especially if the economy weakens. If that happens, Ares will likely suffer.
The private-credit market gave a glimpse of the possibilities last year, when auto-parts company First Brands went bankrupt, and subprime auto lender Tricolor Auto Group collapsed. Both were private-credit borrowers.
Still, at present, everything looks good for Ares. In the third quarter, its revenue surged 67% from a year earlier to $1.7 billion. Management fees rose 29%, and incentive fees (for exceeding return benchmarks on its funds) doubled.
Gaudy numbers, bright future
Net income attributable to Ares Management skyrocketed 144%. The secondaries unit particularly shined, with $74 million of fee-related earnings, up 167% from the same period last year.
In the first nine months of the year, Ares raised $49.1 billion from investors and deployed $100 billion in investments. “Given our concerns about fundraising, deployments and increased uncertainty regarding economic growth, these are definitely positives,” wrote Morningstar analyst Greggory Warren.
So what are promising areas for Ares’ future? Experts expect retail investment in alternative assets to surge in coming years, as these investors seek higher returns. That plays to Ares’ strength, as it has offered investment vehicles to individual investors for over 20 years.
“What’s changed now is the quality of the product, the scale of the product – the investment that we’ve made in servicing the products,” Arougheti told CNBC.
So it looks like Ares is playing in the same league as its bigger brethren.
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