Ares Management’s senior executives anticipate more consolidation in the troubled US regional banking sector, which will create investment opportunities for the Los Angeles-based firm’s private markets business, including real estate and alternative credit.
“I would imagine that the bulk of the primary market opportunity that gets created for us is going to be in and around the commercial real estate lending and the commercial real estate opportunistic equity side of our platform,” said Jarrod Phillips, Ares’ chief financial officer, during its second-quarter earnings call.
Phillips also spoke of potential loan portfolio opportunities arising from the consolidation in the regional banking sector. “The broader opportunity is going to be also in the larger banks as they wrestle with increased regulatory capital requirements. And I think that is largely going to be a story for alternative credit,” he added.
The banking sector challenges could continue to play out for the next year or two, Ares co-founder, chief executive officer and president Michael Arougheti said during the call.
“I think we’re still in the early stages of the transition in the banking market. My expectation is we’ll continue to see more consolidation. With that consolidation, I think we’ll see secondary asset purchase opportunities and reduced competition in the primary market,” he said.
Bank retrenchment from the commercial real estate lending market will in turn drive institutional investor demand for debt, Arougheti said.
“We continue to see strong institutional demand for real estate debt due to the general risk-off sentiment in the banking sector and the outsized return opportunities to inject capital at conservative levels with reset valuations,” he said.
Although transaction activity remains slow, “we’re finding interesting opportunities, particularly in real estate debt and across the platform in sectors where we have differentiated sourcing and operating capabilities,” Arougheti said. In the second quarter, the firm’s real estate deployment included $600 million in European real estate equity, and $400 million in US real estate equity.
On the fundraising front, Ares raised $1.5 billion in total across all its real estate strategies during the second quarter. These included an aggregate $500 million across various real estate debt funds and $600 million for Ares Real Estate Opportunity Fund IV, the firm’s latest US-focused higher-returning real estate vehicle. The fund was launched in October 2022 with a $3 billion fundraising target, PERE previously reported. Its predecessor vehicle – Ares US Real Estate Opportunity Fund III, closed in 2021 with $1.7 billion in commitments, according to PERE data.
The firm is also expecting to launch its fourth European value-add real estate equity fund, along with other private market vehicles, over the next several quarters, Arougheti said.
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