Ares Management has secured an early investment for its latest open-ended real estate debt fund from a familiar source.
One of two vehicles in the Ares real estate core open-end debt series, Ares Real Estate Enhanced Income is a leveraged fund that will issue directly-originated first mortgage loans to investors in stabilized real estate assets. The other vehicle, Ares Real Estate Secured Income, will do the same but without leverage.
The Real Estate Enhanced Income Fund will target a net internal rate of return of 7-8 percent, according to January meeting documents. The vehicle will make loans with two- to three-year maturities of up to 70 percent loan-to-value.
Ares, which did not respond to request for comment, reported $150 million in commitments to the fund last month, according to a filing with the Securities Exchange Commission.
Having invested in Ares’ past two European opportunistic funds – the fourth and fifth in that series – NMSIC felt confident making an early commitment to the manager’s latest debt vehicle, spokesman Charles Wollmann told PERE.
“The council was attracted to the types of assets that will be acquired by this fund,” Wollmann said. “Ares targets high quality investments. They do take on some leverage, but we believe they have the expertise to do that well and achieve solid returns with this fund.”
Ares, which manages $91.4 billion worth of credit, $23 billion of private equity and $10.6 billion of real estate assets, plans to focus this fund on mid-market floating-rate mortgages secured by core-plus collateral, at least in the near term, PERE understands.
The asset manager hopes to deliver risk-adjusted returns in the face of rising interest rates, according to a presentation shared with NMSIC.
Previously, NMSIC invested $75 million in Ares European Real Estate IV in 2014. The fund, which targeted a 12-16 percent net IRR, reported that figure at 14.6 percent at the end of Q3 2018. The sovereign wealth fund followed that with a $92 million commitment to Ares European Real Estate V in 2018; it has yet to report performance data from that vehicle.
As a founding limited partner in the Real Estate Enhanced Income Fund, NMSIC will pay discounted fees, according to a memorandum in the meeting documents. It will receive a 20-basis point reduction to its blended management fee rate, bringing it to 72 bps at full deployment. It will also pay no incentive fees or carried interest.
NMSIC will count the investment as part of its real return strategy portfolio, which targets 80 percent hard assets and 20 percent interest rate-tied financial instruments, Wollmann said, adding that NMSIC has made a concerted effort to trim its equity portfolio since 2011.
“We’ve been building it out since then and really moving away from an overweight to domestic and international equity,” he said. “It’s not been a bad time to be doing that, selling into a pretty successful equity market and better diversifying.”
Wollmann said the Ares Real Estate Enhanced Income fund will complement its $75 million investment in Brookfield’s Real Estate Finance IV vehicle, which launched in 2014. That vehicle had generated a 9.6 percent net IRR as of the end of the second quarter of 2018.