Insights from Ares’ Global Head of Wealth Management

On a more personal note, one of the reasons we host our clients in Beaver Creek is because we consider our clients to be family, and I’ve watched my family grow up on this mountain. While I still find myself pizza-wedging with the best of them, it is both a great joy and annoyance to have my kids whiz by me, fearlessly attacking the hill without abandon. None of us are professionals, but it does get me thinking about the overlap between finding greatness in skiing and greatness in investing.

A ski race is fairly straightforward. Get down the hill and around the gates as fast as possible. But each course is slightly different, and the conditions on any given day are variable. Being great comes down to taking calculated risks and executing on them, over and over (and over again). Winning is the goal but never a guarantee; success is the outcome of years of discipline and the resilience to rise again when the falls inevitably happen.

It sure seems like there is a lot in common with private markets investing. As we stand at the proverbial “start gate” of 2024, the course in front of us is unfamiliar and the weather is questionable. A higher-for-longer rate regime has created a structurally different investing landscape. However, private markets have a demonstrated track record of excellence in nearly any market environment. And, like any great ski racer, Ares’ leaders believe in staying true to a core set of private market investment principles, no matter the asset class.

1. 1. Flexible capital

   Flexible capital has long been a hallmark of private markets, and we believe the need for dynamic solutions is becoming greater than ever. Companies and projects may have constraints due to a lack of traditional bank financing or pinch points due to higher interest rates or inflation. A creative private lender can tailor unique solutions to meet borrowers’ needs and get the deal done.

   Importantly, part of this flexibility means that capital can be provided up and down the capital structure in various formats with varying levels of return expectations. As the market environment shifts, investors may find the best investment opportunities moving from debt to equity or from public to private. Companies may need different types of loans and preferred equity all at once.

   Flexibility also extends to deal and company size. Last year, banks retrenched from the corporate lending market, providing even more opportunities for private lenders. If banks begin to lend again in the larger part of the market, it could create more differentiation between large and middle market loans.

   There is also a value to providing flexibility for others—secondaries investors who are able to offer liquidity to cash-constrained Limited Partners are being rewarded with attractive prices.

2. 2. A focus on fundamentals

   We believe the status quo in private equity is changing and that a focus on creating value through fundamental growth is paramount. While this has been a long-held philosophy within Ares, we believe the landscape today and going forward will force the issue for the rest of the market. Higher interest rates and a more fraught regulatory environment, combined with softer IPO markets, make quick deals less fruitful. The traditional private equity levers of multiple expansion and leverage are not likely to work going forward. Instead, it will be all about building companies’ value and cash flow.

   
   Source: Deutsche Bank Research (Expect SVB Aftershocks) as of March 2023 PE sources of returns includes information from Bain Global private equity report and is as of 2022 representing median value creation by year of exit of fully realized global buyout deals with more than 50 million excluding real estate and infrastructure transactions Projections and forward looking statements are not reliable indicators of future events and there is no guarantee that such activities will occur as expected or at all.

3. 3. Good companies with bad balance sheets

   We are seeing many instances of good companies with bad balance sheets because the cost of debt has doubled over the past year. These situations are an opportunity for lenders to unlock value and provide liquidity and scale to the business. 

   Similarly, there are about $2 trillion of consumer loan assets sitting on bank balance sheets that have the potential need to be addressed, and $117 billion of commercial mortgages tied to office properties, which will need to be repaid or refinanced by owners, often under duress. Each of these presents opportunities for flexible capital providers, particularly in the asset-backed lending and real estate credit asset classes.

I’ve had the privilege of speaking with some professional skiers. They have stated that their job as a skier was not to win every race. Rather, they focused on applying a disciplined process to calculated risks—stacking the odds in their favor, leading to consistent success over time. 

Success is the same in our business. The disciplined process of taking calculated risks can potentially lead to sustained success over time for underlying investors. It’s why we take so much pride in what we do, and why we find such joy in sharing our passion with like-minded clients.