Ares raises its largest US real estate fund

The Los Angeles-based alternative asset management firm has continued to see the majority of capital in the fund series come from overseas investors.

Ares Management Corporation has surpassed the $1 billion mark for the first time for its US real estate fund series, thanks in part to growing support from foreign capital, PERE has learned.

The Los Angeles-based alternative asset management firm has held a final close on approximately $1.04 billion for Ares US Real Estate Fund IX, slightly surpassing its $1 billion equity goal.

The fund is significantly larger than its predecessor, Fund VIII, which closed on $825 million in December 2014. It is also the first US property vehicle Ares has launched and raised entirely, as the fund’s predecessor was started by AREA Property Partners, which Ares acquired in 2013.

Similar to Fund VIII, international investors represented more than 50 percent of the total capital raised for Fund IX, although PERE understands that Ares added more overseas investors with the latter fund than with its predecessor.

Steven Wolf, partner and chief investment officer for US equity within Ares’ real estate group, attributed the growing foreign interest to the firm’s investment approach for the fund, which relies on both high-cash returns and relatively low levels of loan-to-value leverage.

“Our lower leverage strategy is attractive to foreign investors, as it produces a high current income,” Wolf told PERE.

Ares launched Fund IX in 2017, holding a first close in May that year, according to a filing with the US Securities and Exchange Commission. The fund’s limited partners included pension funds, insurance companies, sovereign wealth funds, endowments, non-profits, foundations, financial institutions, including a private banking platform and an asset manager, and family offices.  Among them was the Pennsylvania Public School Employees’ Retirement System, which committed up to $100 million, and Texas Permanent School Fund, which pledged $75 million, according to PERE data.

The investor base for Fund IX was roughly split between new and existing investors, with Ares bringing in 15 new investors for the fund, of which 13 were new to the firm. Ares has invested significantly over the past two years in its business development group, which leads the firm’s global fundraising efforts, a spokesman told PERE. Such an investment is “in part in response to changes in overseas regulations impacting investors’ ability to re-up or allocation issues that prohibited others from making additional commitments to this fund,” he said.

Fund IX is primarily focused on investments in multifamily, industrial and office real estate across the US. Ares has committed approximately 50 percent of the fund’s capital in 12 investments representing more than 4,300 multifamily units and 15.7 million square feet of industrial and office space. These include the acquisition of a multifamily portfolio across the US Sunbelt from Cottonwood Residential for approximately $440 million; as well as investments in a logistics park in the Midwest, three industrial portfolios in the Southeast as well as other multifamily properties in the Southeast, Pacific Northwest and Mid-Atlantic regions.

While Fund IX is the largest US real estate fund for Ares, it is not the firm’s largest property vehicle raised to date. That would be the $1.3 billion Ares European Real Estate Fund IV, which closed in 2015 and its initial target of $1 billion. That vehicle targets investments in residential, retail, office and industrial real estate in leading European markets including the UK, Germany and France.

As of September 30, Fund IX had attracted $870 million, of which Ares had invested $170 million, and was generating a gross and net multiple on invested capital of 1.0x, while EF IV generated gross and net multiples of 1.5x and 1.2x, and gross and net returns of 21 percent and 14.5 percent, respectively, according to the firm’s third-quarter results. The firm reported net returns for its US and European real estate equity businesses of 3.7 percent and 7 percent, respectively, during the third quarter.

Ares’ real estate business managed approximately $10.6 billion of assets across strategies in public and private equity and debt, as of September 30, with $3.9 billion in US private equity real estate and $3 billion in US real estate debt. The group has 76 dedicated investment professionals led by 14 partners.