Fixed Income News Australia interviewed Head of Ares Australia Management Teiki Benveniste to get a behind the scenes look at the new Ares Diversified Credit Fund. We found out Ares Management has a long-standing history with Australian investors.
You have a strong French accent, how did you come to be in Australia, and working with Ares?
I was born in Tahiti and moved to Europe, where I attended a French business school. Early in my career at Société Générale, I held trading, credit analyst and sales positions for loan syndications across Europe, the Middle East and Africa. I was Investing across the full range of private debt/ loans including leverage loans, corporate acquisition, and emerging market debt, which were more liquid. I also worked on project finance and bilateral loans which were more illiquid. In total I spent a year in Paris and six years in London working in private debt for Société Générale.
In 2012, I followed my wife to Australia and found an undeveloped secondary loan market that I thought was about 20 years behind Europe. Few people were trading loans as the banks kept most of their loans on their balance sheets.
I was fortunate enough to get picked up by Macquarie Bank’s investment management division, in a temp role and am very thankful that over six and half years they gave me a fair go and the opportunities to grow to become their lead investment specialist in fixed income.
A year ago, Ares Management came knocking as it saw a great opportunity to expand their presence in the Australian market. For me, it was exciting to be part of the Ares Management and Fidante Partners’ joint venture as it offered the opportunity to combine my experience in leverage loans, private debt and funds management.
Tell me a little about Ares Management?
Ares Management is a leading global alternative investment manager operating integrated groups across Credit, Private Equity, Real Estate and Strategic Initiatives. The firm is headquartered in Los Angeles and its global platform has approximately US$179 billion of assets under management with more than 1,400 employees operating across North America, Europe and Asia Pacific. Approximately US$130 billion of Ares’ AUM (aka assets under management) is in credit. The company began operating in 1997 and strives to maintain a consistent credit-based approach that targets well-structured investments in high quality businesses and assets. Ares believes the key to outperformance in the credit markets is risk mitigation. Ares has the ability to find higher yields and extract a complexity and liquidity premium, while limiting the downside.
Ares’ clients are large and small institutions as well as retail investors. Ares’ first Australian client was the Future Fund in 2008 and we still serve the Future Fund to this day.
This link between Ares and the Future Fund is how Ares and Fidante came to work together with the common thread being John O’Keefe who was Manager of Debt & Alternatives at the Future Fund before taking on his current role as Head of Boutique Strategy & Business Management at Fidante Partners.
The Ares Diversified Credit Fund invests in an underlying fund that has a four-pronged strategy:
- Access attractive risk-adjusted returns through complexity and illiquidity premiums
- Self-origination: Ares self-originates loans and is often the sole lender, generating an origination fee, which it then fully passes on to our investors. These fees can range from 2-3% up front, which we generate because of the size, scale and experience of our operation.
- Well-structured loans with downside protection: This strategy has proven to be highly effective over various market cycles. Through the use of a sound credit selection process and proactive asset management, Ares has seen a relatively small number of defaults and relatively high recovery rates for more than two decades.
The Fund that is now available in Australia invests in an underlying fund that began three years ago, so there already is a track record. Since then, the underlying fund’s performance has been stable with a positive monthly return 85% of the time and the fund has consistently met its monthly distribution.
- Actively managed portfolio: Ares actively manages its portfolios to capitalise on market inefficiencies in part by sourcingrelative value opportunities across the credit spectrum. Because of the underlying fund’s diversification, portfolio managers can select relative value across investments, and when the value dissipates, they can reduce exposures and invest elsewhere.
Why is the fund different?
Two key facts differentiate the fund from others in the marketplace:
- Ares originates 60-70% of the fund’s loans and earns origination fees that are passed on to investors.
- As originators, they also determine the terms and documentation, including the covenants on the loans to help protect investors.
Since self-originated private/direct loans are not rated by definition, Ares considers the loans we underwrite would be as having a credit rating that would range from Single-B to BBB.
Is there anything else you’d like to tell our readers?
In Australia, “private debt” varies across a variety of sub-sectors. For example, there are bank loans that are liquid and can be readily traded. There are also illiquid, non-traded direct loans that are self-originated by non-bank lenders, who originate loans by building long term relationships with borrowers and sponsors. In this case, direct lenders control the relationships, documentation and economics of these loans. We call it “Control Direct Lending” and this is different from “Participation Direct Lending” where managers are merely participants in direct loans similar to a syndicated loan arrangement.
Ares participates in all of the roles above. However, Ares focuses on Control Direct Lending, which is enabled by the depth and breadth of the Ares platform based on the benefits to investors for fees and our ability to underwrite these self-originated loans. Ares’ investment strategy tends to avoid Participation Direct Lending and focuses on maximising the benefits of its market leading position.
- Performance of underlying fund since inception, 6.04% per annum in US dollars after fees over the past three years
- Seeks to be 100% hedged back to AUD
- Minimum investment $100,000
- Wholesale investors only
- Target 6% annual income which is paid monthly; the underlying fund has consistently delivered its monthly distribution
- Underlying fund management fee of 1.25% per annum, performance fee of 15% only when the fund earns more than 6% per annum
- Current yield is just shy of 8% per annum
- Daily liquidity for applications and quarterly liquidity for redemptions, at net asset value with no buy/sell spread. Every quarter, the fund permits 5% of its capital to be returned to investors – keep in mind the US fund is now US$1 billion. If requests exceed 5%, then they are pro-rated, there is no queue as such.