Over the 12 months ending March 31, 2025, Ares set a new record with $50.4 billion in direct lending commitments across 351 transactions, marking the highest annual total for its U.S. Direct Lending business.
- Ares Management’s assets under management (AUM) surged 27% in Q1 2025, reaching $545.9 billion.
- The firm’s real assets portfolio nearly doubled, significantly expanding its scale and influence in real estate and infrastructure sectors.
- This growth was driven in part by strategic acquisitions, such as the purchase of GLP Capital Partners Limited’s international business, which doubled Ares’ real estate AUM to $96 billion.
The expansion strengthens Ares’ position as a leading global alternative asset manager, especially in real estate and digital infrastructure.
The firm’s diversified capabilities are expected to attract a broader investor base and enhance resilience across economic cycles.
Ares Average Deal size & Business types
Ares Management engages in lending activities across a diverse range of businesses and deal sizes, with a significant focus on private credit and direct lending to middle-market companies.
Ares Average Deal Size:
- For European direct lending in 2017, the "sweet spot" was seen as mid-market companies with EBITDA between €5 million and €100 million seeking debt financing anywhere from €20 million to up to €500 million of capital. Over a decade leading up to 2017, Ares had put over €10 billion into approximately 150 investments across Europe, suggesting an average investment size in that region of around €67 million at that time (calculation based on source data).
- More recently, in the U.S. direct lending market in full-year 2024, Ares closed a record $48.2 billion in commitments across 341 transactions. This indicates an average transaction size of approximately $141 million (calculation based on source data). In the fourth quarter of 2024 specifically, they closed $13.8 billion across 90 transactions, an average of about $153 million per transaction (calculation based on source data).
- The Ares Capital Corporation (ARCC) portfolio, which focuses on U.S. middle-market companies, had a fair value of approximately $27.1 billion across 566 portfolio companies as of March 31, 2025. This suggests an average exposure of roughly $48 million per portfolio company within ARCC's holdings (calculation based on source data), though this represents held investments rather than initial transaction size.
Types of businesses and industries Ares lends to:
- Ares invests in a diversified portfolio across various asset classes. The Ares Diversified Credit Fund aims for diversification across geography, industry, and issuer.
- Their direct lending is primarily to private companies, many of which are middle-market companies. These borrowers seek capital for growth initiatives or acquisitions.
- Ares supports companies across a wide range of sectors. The portfolio is noted as being diversified in terms of industry sector. Some sectors highlighted in the sources include pharmaceuticals, pet wellness, aerospace, defense, digital services, healthcare, technology, pet care, and essential business services. These are sometimes described as resilient or defensive industries with strong cash flow characteristics.
- A detailed list of Ares Capital Corporation's portfolio investments as of March 31, 2025, provides extensive examples of the industries they lend to. Categories include:
- Sports, Media & Entertainment
- Consumer Durables & Apparel
- Consumer Services
- Health Care Equipment and Services
- Pharmaceuticals, Biotechnology & Life Sciences
- Insurance
- Commercial & Professional Services
- Software & Services
- Consumer Distribution and Retail
- Materials
- Financial Services
- Capital Goods
- Independent Power and Renewable Electricity Producers
- Automobiles & Components
- Food & Beverage
- Technology Hardware & Equipment
- Energy
- Gas Utilities
- Transportation
- Ares originates these loans. They also act in roles such as administrative agent, lead arranger, and bookrunner for these transactions. They often serve as the sole or lead arranger.
- Loans are predominantly floating rate and senior secured. They offer a range of debt capital products, including senior and unitranche loans, and subordinated loans. A significant portion of deals are predominantly first lien on operating companies and associated assets.
Ares Management's Strong Underwriting Standards and History of Low Default and Loss Rates
Ares Underwriting Standards:
- Ares's approach involves detailed and selective due diligence and credit underwriting processes, potentially more so than traditional banks, especially when lending to private middle-market companies.
- They carry out due diligence on companies alongside financial sponsors.
- Due to holding loans to maturity, Ares places more emphasis on the borrower's medium and long-term business trajectory, including their durability through economic cycles, the competitive landscape, and the sustainability of their margins and cash flows.
- Ares utilizes covenant protection in its deals for risk mitigation. Daniel Sinclair of Ares noted in 2017 that they have never underwritten a covenant-lite deal. While the average number of covenants per deal may have decreased over time, they remain focused on obtaining covenants that provide the most robust protection.
- Non-banks like Ares tend to issue loans with terms and covenants that more holistically and accurately account for the health and trajectory of the borrowing business.
- They benefit from a level of control Ares has over the deal structure and ongoing monitoring. This includes directly originating loans and, in some cases, having board observer seats and receiving monthly financial data from portfolio companies.
Ares Default and Loss Rates
- Ares highlights a history of low default & loss rates.
- Their average annual default and loss rates are significantly lower than those of the broader U.S. Loan and High Yield Markets.
- Specific historical data provided (as of September 30, 2021, with some data points through March or June 2021, or September 2021 depending on the category) shows:
- U.S. Direct Lending – First Lien Loss Rates: <0.1% (Ares avg annual from inception Oct 2004 through Mar 2021) compared to 2.29%/4.12% for the U.S. Loan/HY Market.
- U.S. Direct Lending – Second Lien & Subordinated Loss Rates: <0.2% (Ares avg annual from inception Oct 2004 through Mar 2021) compared to 2.29%/4.12% for the U.S. Loan/HY Market.
- U.S. Syndicated Loan Default Rate: 0.80% (Ares avg annual Jan 2009 through Sep 2021) compared to 2.48% for the U.S. Loan Market.
- U.S. High Yield Bond Default Rate: 0.98% (Ares avg annual Jan 2009 through Sep 2021) compared to 3.99% for the U.S. High Yield Bond Market.
- European Direct Lending – Gross Loss Rate: 0.06% (Ares avg annual since inception July 2007 through Jun 2021).
- Alternative Credit – Illiquid Annualised Loss Rate: 0.02%.
- Real Estate Debt – Credit Loss Rates: 0.00% (Ares Commercial Real Estate Corporation since inception through Jun 2021).
- Sinclair described the loss rates as extremely low on an absolute basis and lower than those in liquid markets.
- These low loss rates are partly attributed to Ares's deals being predominantly first lien on operating companies and associated assets, their level of control over deal structure and monitoring, and their ability to work with borrowers to adjust terms to avoid default, particularly in challenging market conditions.
Ares Competitive Advantages Over Traditional Banks
Ares Management, as a leading non-bank direct lender, possesses several competitive advantages over traditional banks in the lending market:
- Speed and Certainty of Execution Ares can provide fully committed financing, often acting as the sole or lead arranger. Private loans can be completed in two or three weeks, which is about half the time bank loans take. Traditional banks, acting as brokers, package and sell loans, requiring them to identify buyers and conduct due diligence on them, which adds time. Bank loans also often include "flex provisions" allowing terms to be changed, whereas direct lenders like Ares offer financing with no flex language. This certainty of execution is highly valued by borrowers, particularly in uncertain markets, and is a key reason they are willing to pay a premium.
- Deeper and Longer-Term Underwriting Focus Unlike banks that often hold loans for less than 12 months before selling them, non-banks like Ares hold loans directly and to maturity. This necessitates a more detailed and selective due diligence and credit underwriting process, with greater emphasis placed on the borrower's medium and long-term business trajectory, including durability through economic cycles, the competitive landscape, and the sustainability of margins and cash flows. Traditional banks, in contrast, tend to focus more significantly on near-term financial projections. Ares also carries out due diligence on companies alongside financial sponsors.
- Customized and Flexible Loan Terms (including Covenants) Non-banks tend to issue loans with terms and covenants that more holistically and accurately account for the health and trajectory of the borrowing business. Ares explicitly states they have never underwritten a covenant-lite deal and remains focused on obtaining covenants that provide the most robust protection, even if the average number of covenants per deal has decreased over time. Borrowers are willing to pay a premium for this customization and the "insurance" that covenants provide. Furthermore, Ares is well-versed in working with borrowers to adjust terms as needed to avoid default in challenging market conditions, offering flexibility that contrasts with the onerous legal process required for defaults in public markets.
- Direct Origination and Fee Benefits Ares's focus on self-origination and often being the sole arranger provides advantages in structuring and pricing. Upfront fees charged to the borrower in non-bank transactions generally remain with the loan and accrue to the benefit of investors, contributing to the yield premium, whereas banks keep these transaction fees for themselves in syndicated deals.
- Relationship and Partnership Approach Direct lending is a relationship business where financial sponsors expect to work with a firm for five to seven years. Ares emphasizes building and leveraging strong relationships and credibility with sponsors and management teams over time. They are there for borrowers if there is a "bump in the road," which differentiates them from lenders who might be perceived as opportunistic.
- Privacy for Borrowers Private companies often prefer to share sensitive financial data with a small number of private lenders rather than a large syndicate of banks bidding on their loan, due to concerns about information leaking to competitors.
- Ability to Handle Complex Deals Ares offers a range of debt capital products (senior, unitranche, subordinated), allowing them to be involved early in transactions and see the opportunity ahead of those with a narrower product set. They can also manage larger debt financing amounts that might be challenging for multiple banks to arrange.
- Historically Lower Loss Rates Ares highlights a history of low default and loss rates. Their average annual loss rates in U.S. Direct Lending (both First Lien and Second Lien/Subordinated) and European Direct Lending have been significantly lower than the average default rates of the broader U.S. Loan and High Yield Markets. These low loss rates are partly attributed to their deals being predominantly first lien on operating companies, their control over deal structure and monitoring (including direct origination, due diligence, and receiving monthly financials), and their ability to work with borrowers to adjust terms and handle workout scenarios.
Overall, Ares's model as a direct lender, focused on private middle-market companies, allows them to offer a combination of speed, certainty, customized terms, deeper underwriting, and a partnership approach that provides distinct advantages for borrowers compared to traditional bank financing. This has contributed to private credit gaining market share from traditional lending.
Compelling Yield and Attractive Upfront Economics
Investors in the Ares Diversified Credit Fund seek high current income through a structural yield premium over traditional credit markets, a core strategy tenet.
- The Fund seeks to provide a consistent yield premium over syndicated loans and high yield bonds. This has been sustained over time, with the Underlying Fund demonstrating an average premium of 210 basis points over leveraged loans and 106 basis points over corporate bonds between 2017 and 2021. Private credit, in general, has historically rewarded investors with yields 200-400bps higher than public debt.
- A significant component of this attractive return comes from the direct origination model. Unlike banks in syndicated transactions who charge and keep the underwriting fee, the upfront fees charged to the borrower in a private credit loan generally remain with the transaction and accrue directly to the benefit of investors. This is a key difference in economics that is fully passed through. Illustrative direct lending economics show an upfront fee component contributing meaningfully to the stated asset yield.
- These attractive upfront economics are fully passed through to investors. The yield premium is driven by both a pricing spread and these valuable fees. It is not viewed as some ephemeral “illiquidity premium,” but rather a result of real value-add.
Superior Risk-Adjusted Returns Across Market Cycles
Beyond just higher yield, the critical element for institutional capital is achieving superior risk-adjusted returns. This means delivering attractive income streams with a demonstrably lower risk profile than comparable asset classes.
- Private credit's allure is its return-for-risk profile, exhibiting one of the highest Sharpe ratios in today's markets compared to other liquid credit alternatives. Current returns are cited in the low double digits (~10-12%). Historically, the European direct lending strategy managed by Ares has generated over 10% asset level gross returns.
- This is achieved with lower risk. Private credit shows lower volatility (~5%) compared to more liquid bank loans and high-yield bonds (9-12%). It also demonstrates significantly lower loss rates (~1%) compared to bank loans and high-yield bonds (1.0-1.5%).
- The strategy explicitly offers meaningful downside protection. This protection is evidenced by a history of low default and loss rates which are significantly below those seen in the broader U.S. Loan and High Yield Markets. For example, Ares' average annual loss rate in U.S. Direct Lending (First Lien) is cited as less than 0.1%, dramatically lower than the 2.29%/4.12% default/loss rates in the U.S. Loan/HY market. European Direct Lending gross loss rates have been similarly low (0.06%). These low loss rates are attributed to rigorous underwriting, predominant first lien positions, control over deal structure, active monitoring, covenant protection, and workout expertise.
Income Stability and Floating Rate Advantage
The nature of direct lending also provides features that enhance income stability and offer advantages in certain market conditions.
- The Fund seeks to provide a high level of current income. Distributions are paid monthly. Private credit can be viewed as a more reliable source of income due to historically attractive yields and defensive structures.
- Portfolio investments predominantly consist of floating rate loans. This means the yield "floats" with market interest rates, directly tied to base rates like SOFR (formerly LIBOR). As short-term interest rates move, the yield of private credit adjusts. For investors, this provides potential for positive earnings in a rising interest rate environment.
- The core strategy involves investing in a diversified portfolio across global credit asset classes. Diversification across geography, industry, and issuer further contributes to risk mitigation and income stability.
Investors are engaging in a new lending model that bypasses intermediaries, delivering value directly to them. This approach leverages expertise and scale in a less liquid market, focusing on credit quality and downside protection. Direct lending offers unique returns and risk profiles that traditional finance can't match, making it an attractive option for investors seeking yield and stability.
Sources:
- Private Debt Dominance | Ares Wealth Management Solutions
- Ares Diversified Credit Fund - Ares Australia Management
- Ares Capital Portfolio
- thehedgefundjournal.com
Our Opinion
Ares' massive growth can been as both inspiring and concerning. Inspiring because it validates the alternative lending industry's business model, but concerning because it shows how dominant the largest players are becoming. Many alternative lenders would be wondering how to compete when giants like Ares can deploy capital at such scale.
For mid-sized alternative lenders, this trend suggests Ares is moving upmarket, potentially creating space in the lower middle market for smaller players to thrive without competing directly against them.
The industry diversification is a confirmation of the industry's shift toward recession-resistant sectors in preparation for potential economic headwinds.
Overall Ares is both a model to emulate and a competitive threat. Lenders need to navigate around by finding specialized niches where they can add unique value.
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