Ares Management saw fundraising in the third quarter dip from last quarter's record, but the firm's executives say they remain confident that capital inflows will pick up by year's end.
The firm's fundraising ticked down slightly to $31 billion in the three months ended Sept. 30 from a quarterly firm record of $36 billion for the prior quarter.
However, Ares co-founder and Chief Executive Michael Arougheti said despite an overall fundraising slowdown, fourth-quarter inflows are setting Ares up for another record fundraising year.
He added that just last week the firm held a first close on more than $8 billion for its latest U.S. senior direct lending institutional funds and that it expects to hold a final close for its infrastructure debt fund in November above the fund's $6 billion target, among other anticipated fund closings by year's end.
Strategies outside of Ares core credit business, including infrastructure, real estate and secondaries, represented more than half of the capital raised in the third quarter. The firm's core credit strategies, meanwhile, collected $15.2 billion in the quarter, down from $23.7 billion in the second quarter and $19.3 billion in the year-ago period.
Ares deployed a total of $34.8 billion in the third quarter, down slightly from $36 billion in the second quarter and more dramatically from $41.7 billion in the year-ago period. Credit investments accounted for around $22.3 billion of deployed capital down from $23.7 billion in the prior quarter and $33.1 billion in the year-ago period.
However, the firm's real assets business, including infrastructure and real estate, saw capital deployment grow to $9.7 billion in the third quarter, from $7.6 billion in the prior quarter and $5.4 billion in the year-ago period.
Arougheti acknowledged that U.S. direct lending deployment was slower as a result of muted mergers-and-acquisitions activity. However, he pushed back against the narrative that higher interest rates automatically imply a continued dampening of capital deployment.
He pointed to the large number of aging portfolio companies in private-equity portfolios combined with a vast pool of capital raised that still needs to be invested, as a potential driver for investment activity.
When companies become stuck in a private-equity firm's portfolio, managers will sometimes turn to credit providers to recapitalize balance sheets or pursue dividend recapitalizations to generate liquidity for investors. Mounting pressure to return capital to investors may also drive more deals as sellers adjust their pricing expectations.
Jarrod Phillips, Ares's chief financial officer, said he expects "stronger deployment in the fourth quarter, which is nearly always our strongest deployment quarter of the year."
For example, in late September, Ares agreed to acquire a $1.1 billion direct lending portfolio from an institutional investor that is expected to close in the fourth quarter, according to Arougheti. Ares Capital Corp., one of the firm's business-development companies, also recently announced an agreement to buy fellow BDC MidCap Financial Investment Corp. from Apollo Global Management.
Ares's total assets under management increased to $690.6 billion in the third quarter from $671.3 billion in the previous quarter and $595.7 billion in the year-ago period.
The firm reported fee-related earnings of $524.2 million in the quarter, up from $491.1 million in the second quarter and $471.2 million in the year-ago period.
Shares of Ares closed up 2.95% to $127.47 on Thursday.
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