Ares sees a bright future for continuation funds and NAV

Credit and LP-led secondaries are also on the firm's list of areas set to see big growth this year.

Ares Management sees 2023 being a big year for continuation funds and NAV loans, according to the firm’s CEO, Michael Arougheti.

The PE and credit giant, which launched its first credit secondaries commingled fund and expects to hold a first close on the vehicle this year, also thinks there’s big business in that market.

“We intend to further scale our presence in this new strategy with the recent launch of our first credit secondaries commingled fund, with a first close expected later this year,” Arougheti said on the firm’s first quarter earnings call recently.

While the firm is most optimistic on the LP-led secondaries front – Arougheti expects a “record year” there due to LP capital constraints illiquidity and the denominator effect – Ares also expects GP-led activity to fire up.

Continuation funds and NAV loan opportunities are going to “turn on in earnest,” he said. Ares’ pipeline is building as GPs are either in between fundraises or are experiencing slower capital raises for vehicles in market.

A ‘record year’ for LP-led secondaries

On the LP-led front, Arougheti said: “We are seeing LPs seriously look at liquidity in the secondary market. I would expect that 2023 will likely be a record year for LP-led secondaries just based on what we’re seeing year-to-date and the way the pipeline is developing.”

Pricing in the LP-led secondaries market is more attractive “than it’s been in a long time” Arougheti said, adding that average bids are sitting at 85-90 percent of net asset value for private equity and 70-75 percent of NAV for venture capital.

New credit secondaries fund

The launch of the new credit fund, the name of which could not be determined by press time, comes as Ares is set to mark the two-year anniversary of its acquisition of Landmark, with the transaction closing in June 2021. Landmark has been fully integrated into Ares, and “retooled from a product perspective.” The firm is now working to “innovate and grow” the platform, Arougheti said.

The fund follows the official launch of its debt secondaries business in March via a joint venture with Gulf giant Mubadala Investment Company. The Los Angeles-headquartered firm said in a statement at that time it would initially deploy a roughly $1 billion pool of capital to buy LP stakes in credit funds and invest in credit-focused GP-led processes.

The joint venture “well positions us to be a market leader in the growing credit secondary sector, particularly due to our leading private credit franchise, knowledge, insights and relationships with middle market companies and sponsors,” chief executive Michael Arougheti said on the firm’s first quarter earnings call on Friday.

Credit secondaries is an area where legacy Landmark Partners hadn’t raised dedicated capital in the past. Arougheti said the fund “is another great example of the types of product extensions and growth that we can bring to acquired platforms shortly after acquisition.”

Alongside the credit fund, the firm launched its non-traded, closed-end Ares Private Markets Fund, which invests in private assets acquired primarily on a secondary basis. The firm has “high hopes for the long-term growth opportunity” for that vehicle, Arougheti told listeners.

In ‘capital formation mode’

Ares is also in market raising real estate and infrastructure secondaries vehicles, with Arougheti stating the secondaries business is in “capital formation mode.”

Ares closed its latest private equity secondaries fund, Landmark Equity Partners XVII, below its target late last year on around $2.4 billion, affiliate title Secondaries Investor reported. That vehicle was seeking $6 billion, according to Secondaries Investor data.

The firm is deploying that vehicle, which was raised during the acquisition and initial integration period, Arougheti said.