(Bloomberg) – Ares Management Corp., one of the dominant players in private credit, now underwrites contracts of up to $ 3 billion and may soon provide loans of up to $ 5 billion to a single borrower, CEO Michael Arougheti. noted.

Private equity firms are increasingly bypassing syndicated loans arranged by banks and turning to direct lenders, usually at a higher cost. The reasons include speed of execution, confidentiality or a need for unconventional financing.

“It is accelerating,” Arougheti said at the Bloomberg Invest Global Summit on Wednesday in New York. “There are clear circumstances where private markets, even though they are more expensive, offer a much better value proposition to sponsors.”

Ares, along with Blackstone Inc., Apollo Global Management Inc., and Blue Owl Capital Inc., are among a small handful of direct lenders able to challenge banks when it comes to debt buyout financing. It was the first, in 2016, to take out a so-called unitranche loan of over $ 1 billion.

At $ 5 billion or less, borrowers are willing to pay extra for the flexibility of dealing with a direct lender, a premium Arougheti estimates at 50 to 100 basis points. Plus and the cost of syndicated bank credit is just too cheap to ignore, even though it takes longer and involves more complexity, he said.

Right now, the pandemic’s merger boom in the United States is fueling demand for private debt financing. But Europe is quickly catching up.

“Europe has historically been five or 10 years behind the US market, but this big lending and LBO trend is also accelerating there,” Arougheti said.

Institutional investors and – increasingly – retail investors invest money in direct lending funds because they offer higher returns than corporate bonds or syndicated loans. Arougheti said New York-based Ares raised almost as much in the first half of the year as it did throughout 2020 and demand has remained as strong since.

Earlier this year, Ares acquired Landmark Partners, a specialist in buying and selling stakes in limited partner funds, and US real estate operations from Black Creek Group.

Arougheti predicted that the pace of consolidation among alternative asset managers will continue to accelerate and said Ares intends to expand, in part through acquisitions, into credit, real estate and infrastructure. . Private equity, in which the company has around $ 31 billion in assets, is less of a priority.

“Private equity: it’s a great business. In my mind, this is not a growing business, ”he said. “The investment market opportunity is just not the same. “

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