Ares Management Corp. raised $6.6 billion for its second asset-based credit fund, as it seeks to snap up portfolios from banks that want to sell them to comply with higher capital requirements.
The firm’s Pathfinder Fund II, which exceeded its $5 billion target, will invest in portfolios of assets that offer steady cash flows, Ares said in a statement Monday. That could include pools of auto loans, credit card receivables, mortgages and other bundles of loans.
The fund, which can make debt and equity investments, is 80% larger than its predecessor, reflecting investor demand for credit as private equity funds struggle to raise cash amid rising rates and a deal slowdown.
Asset-based lending has emerged as a hot corner of credit markets, with major firms pursuing an alternative investment that potentially offers both steady cash flows and protection if defaults spike.
Read More: Ares Sees Fundraising Boost From Rush to Private Credit
Ares has been actively negotiating with banks that aim to offload loan portfolios that have high capital charges, which makes them less profitable to hold on their balance sheets.
It recently closed on a so-called capital relief trade for a portfolio of more than $5 billion of “super-prime” auto loans from a large regional bank, according to Joel Holsinger, co-head of alternative credit at Ares. He predicts a rush of deals before year-end.
“This is no different than where direct lending was in 2011 or 2012,” Holsinger said in an interview. He added that a “fragmentation” ensued after the 2008 financial crisis and that “excessive regulation” has pushed certain asset classes out of banks.
Ares Chief Executive Officer Michael Arougheti said on the firm’s second-quarter earnings call that he expected the US banking crisis that started in March could play out for two more years. The firm acquired PacWest Bancorp’s lender finance portfolio for $3.5 billion in June.
For institutional investors, asset-based credit offers diversity and uncorrelated risk beyond traditional direct loans to companies, Keith Ashton, co-head of alternative credit at Ares, said in an interview.
Limited partners see the fund as opportunistic given “what’s going on with the securitization market being slightly dysfunctional, and what’s going on with the banks and liquidity and credit contraction,” Ashton said.
In five years, most pensions will allocate 2% to 4% of their portfolios toward asset-based credit, Holsinger said.
Ares raised $3.7 billion for its first Pathfinder fund in March 2021. It has $378 billion of assets under management, including $27.8 billion in its alternative credit business, as of June 30.
The firm reports earnings Oct. 31. Ares shares are up 47% this year.
(Adds share increase in last paragraph. A previous version of this story corrected the dollar amount in headline, first paragraph.)