A Guide to Private Credit | EMEA & APAC | Ares Wealth Management Solutions

Until recently, direct lending has predominantly been the purview of sophisticated institutional investors. Now, the investing public can access direct lending products more easily via new fund structures with minimal lockups, no queues or capital calls and more transparent reporting structures.

“Driven by investor demand, regulatory shifts and the need for flexible lending solutions, we believe this asset class will play a vital role in funding growing companies and economies into the future.”

- Raj Dhanda, Partner, Global Head of Wealth Management

In this comprehensive guide, we highlight the key aspects of direct lending’s historical development and its characteristics and placement within investment portfolios, as well as its future prospects. As the asset class evolves and expands in size, choice and sophistication, direct lending may play an important role in well-diversified portfolios.

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Key Highlights

Making the case for direct lending private credit

While it may feel like direct lending has recently burst onto the investing scene, this is not a new asset class. Rather, it is regarded as an established asset class that has lived outside the mainstream media limelight and represented a longer-term opportunity for investors.

Structural Shifts in Supply and Demand for Private Capital

Continued bank retrenchment
Structural shift from public to private capital
Increased reliance of private equity on direct lending for deal financings

Expansion of Average Issuer Size in Loan and High-Yield Markets

The growth of the leveraged finance markets and the increase in average issuer size expand the addressable market
Especially during periods of dislocation, private capital providers continue to take market share

Credit Markets Are Less Liquid

Growth of passives with structural duration mismatches drives greater volatility in liquid markets
Dealer inventories and market making reduced
Private solutions represent an attractive alternative

Defining the opportunity –
characteristics to understand

Capital Structure

Loan position in the capital structure, loan to value, leverage and interest coverage.

Yield

Sustainability of the yield premium is driven by supply/demand and convenience factor for borrowers.

Risk and Return

Risk and return have historically outperformed most other asset classes.

Not all direct lending is the same

Size Differences & the Middle-Market

The middle-market of private companies represents a significant economic force. It may offer favorable spreads, lower leverage and less competition.

Sponsor vs. Non-Sponsor

Sponsor-backed companies can provide scalability and general partners (GPs) can give capital support during difficult times. Non-sponsor-backed companies can fetch better economics and stronger lender protections.

Flexibility in Allocation

Different flavors — small, mid, large; sponsor, non-sponsor; U.S., Europe, Asia — offer varying risk-adjusted returns.

Core considerations for investment success

Good underwriting

Historical performance is crucial for benchmarking.

Deep borrower relationships

Active origination through networks.

Incumbency

Growing with a firm and sticking with it as it grows.

Investment team scale

Covers diverse markets and sponsors.

Flexibility

Selectivity across flavors; adapts to market conditions.

Diversification

Smaller average position sizes can enhance risk management.

Read the guide in full

For Professional Investors and Qualified Investors use only.

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Why Ares for direct lending?

As one of the first direct lending groups to establish itself in Europe in 2007, we believe we have one of the largest teams in Europe, with 85 investment professionals across six offices.¹

The Investment Team has built what Ares believes to be deep and trusted relationships with sponsors, corporates and advisors, and it considers itself to be the preferred partner for many in the market, benefiting from a first-mover advantage.

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Data as of June 30, 2024. Includes offers accepted.

Past performance is not a guarantee of future results.

This material is for informational or educational purposes only and does not constitute investment advice or a securities recommendation under all securities regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor's own objectives and circumstances in conjunction with a professional investment advisor.

EMEA stands for Europe, Middle East and Africa. APAC is an abbreviation of Asia-Pacific and covers East Asia, South Asia and Southeast Asia.

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A Comprehensive Guide to Private Credit

Development, expansion and opportunity

Read the guide in full