Ares New Healthcare ABL Unit

Ares Management Corporation has expanded its asset-based lending (ABL) unit by adding a healthcare-focused team from Huntington Bank, led by industry veterans Todd Gordon, Dan Berger, and Nathan Brenneman.

This team will launch a specialized healthcare ABL platform within Ares Commercial Finance (ACF), enhancing ACF’s offerings for middle-market healthcare companies. Ryan Cascade, Head of Ares Commercial Finance, emphasized that this addition will broaden Ares' lending capabilities in the healthcare finance market.

Todd Gordon, now Managing Director and Head of Healthcare ABL at Ares, noted that their expertise combined with ACF’s platform will offer valuable financing options. This expansion addresses the growing demand for asset-based financing, complementing Ares’ existing credit offerings for mid-market companies.

Ares Management’s expansion into healthcare asset-based lending (ABL) aligns with a confluence of market dynamics that have created a high-demand environment for alternative lenders.

Analysis of the Key Drivers and Opportunity Scale

1. Medicare/Medicaid Reimbursement Delays

• Payment Delays: Medicare and Medicaid reimbursements often take 30–120 days to process due to complex billing requirements, leaving providers with cash flow gaps. For example, hospitals reported a 28% decline in cash reserves (from 173 to 124 days’ cash on hand) between 2022–2023, driven partly by delayed claims.
• Underpayment Pressures: Medicare reimbursements have declined 29% since 2001 (adjusted for inflation), while Medicaid reimbursements fail to cover 89% of hospitals’ costs on average. These shortfalls force providers to seek bridge financing to maintain operations.

2. Surging Operating Costs

• Cost vs. Reimbursement Gap: Medical costs are projected to rise 8% in 2025—the highest rate in 13 years—driven by labor, drugs, and inflation. Meanwhile, Medicare’s 2025 reimbursement rate increases for hospitals (2.9%) and cuts for physicians (-2.83%) lag far behind cost growth.
• Margin Compression: Hospital operating expenses rose 24–89% for labor, drugs, and utilities from 2022–2023, while revenue growth stagnated. This has pushed 15% of claims into denial disputes, costing providers $19.7B annually in adjudication expenses.

_{Source: collaboratemd.com}

3. Traditional Bank Retreat from Healthcare Lending

• Regulatory Constraints: Post-2008 regulations (e.g., Basel III) forced banks to reduce exposure to sectors like healthcare, which face higher regulatory scrutiny and reimbursement volatility.
• Private Credit Advantage: Alternative lenders like Ares offer bespoke structures and faster execution, bypassing banks’ risk committees. Banks now account for <30% of middle-market loans, down from 80% in 2000.

4. Middle-Market Healthcare Lending Opportunity

• Market Size: The U.S. middle market (companies with $10M–$1B revenue) represents ~1/3 of U.S. GDP (~$8T) and includes 200,000 private companies. Ares targets healthcare firms within this segment, offering ABL facilities up to $500M.
• Returns Potential: Healthcare direct lending delivers a median net IRR of 15% (vs. 11% for generalist lending), driven by higher margins and banks’ reluctance to serve the sector.

Why This Environment Favors Ares

Ares’ new healthcare ABL team—staffed by Huntington Bank veterans—leverages its $349B credit platform to address these pain points. By providing rapid, flexible financing to middle-market providers, Ares capitalizes on:

• Cash flow gaps from delayed reimbursements.
• Refinancing needs as traditional lenders exit.
• Sector specialization, which reduces risk and commands premium pricing.

With healthcare ABL demand rising amid structural shifts, Ares is positioned to capture a significant share of this multi-trillion-dollar market.

Competitive Landscape of Healthcare ABL

Incumbent Players and Market Positioning

Prior to Ares’ entry, the healthcare ABL space was dominated by specialized lenders including SLR Healthcare ABL (originating $1.5B+ since 2007), White Oak Healthcare Finance ($395M facility to Genesis Healthcare), and Comvest Credit Partners ($109M facility to Oceans Healthcare). These lenders typically target facilities with $3M–$395M credit facilities, focusing on stressed healthcare providers facing regulatory or reimbursement challenges.

SLR’s model exemplifies sector specialization:

• Collateral Focus: 80–85% advance rates on Medicare/Medicaid receivables versus 70–75% for commercial payers
• Pricing: Floating rates of SOFR + 600–800 bps for senior tranches, with monitoring fees of 0.25–0.5% of committed lines

_{Source: slrcapitalpartners.com}

Ares’ Differentiated Approach

Ares’ $349B credit platform enables structural advantages:

1. Larger Ticket Sizes: $500M facility capacity versus SLR’s $15M median deal size
2. Cross-Selling: Integration with Ares’ $8B healthcare private equity portfolio for growth financing
3. Pricing Leverage: Ability to undercut competitors by 50–75 bps through balance sheet lending

This positions Ares to capture upper-middle-market deals previously serviced by syndicated bank loans, particularly for private equity-backed roll-ups requiring $200M+ facilities.

Market Impact: Pricing, Terms, and Deal Flow

Pricing Compression Risks

Ares’ entry introduces downward pressure on spreads:

• Historical Benchmark: 15% median net IRR for healthcare direct lending
• Current Pricing: Senior tranches at SOFR + 550 bps (Ares) vs. +650 bps (SLR)611

The disparity stems from Ares’ ability to blend ABL facilities with term loans at 12–14% all-in yields, creating 300–400 bps arbitrage versus standalone ABL providers511.

_{Source: abladvisor.com, alternativecreditinvestor.com}

Covenant and Structural Innovations

Ares is pioneering hybrid structures combining features from leveraged finance:

• Last-Out Tranches: Junior debt at 18–22% yields with warrants in facility expansions
• Cross-Collateralization: Linking ABL facilities to intellectual property in medtech deals

This contrasts with traditional healthcare ABL’s reliance on strict borrowing base certificates and lockbox controls

_{Source: occ.treas.gov, haynesboone.com}

Deal Flow Acceleration

The middle-market healthcare ABL pipeline is projected to grow 23% annually through 2027, driven by:

• Regulatory Catalysts: 89% of hospitals now below 150 days cash on hand due to Medicaid redeterminations
• Refinancing Wave: $47B in healthcare loans maturing through 2026 requiring ABL takeouts

Ares’ brand recognition has already shifted borrower preferences, with 62% of private equity sponsors in Proskauer surveys citing platform lenders as preferred partners for add-on acquisitions.

Imminent Consolidation Wave

The Ares move mirrors SLR’s 2013 acquisition of Gemino Healthcare Finance, triggering three likely outcomes:

1. Vertical Integration: Expect Blackstone/Credit Suisse to acquire niche players like SLR Healthcare ABL
2. Talent Wars: 40% compensation premiums for underwriters with CMS reimbursement expertise
3. Regulatory Arbitrage: Non-bank lenders exploiting Basel III’s 20% risk weight for ABL versus 150% for cash flow loans

Our Opinion

Ares' entry into healthcare lending brings capital and brand recognition, but success isn't guaranteed due to the complexities of CMS regulations, reimbursement cycles, and healthcare receivables risks.

The healthcare ABL market offers opportunities for alternative lenders as hospitals face cash flow issues, banks retreat, and costs rise. Success requires financial strength and specialized expertise, with a focus on underwriters who understand both credit and medicine.

Ares' presence validates the market's potential for attractive returns, but sustainable success demands deep sector knowledge. The opportunity is real, but so are the risks, with details being crucial.

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