Ares Explores More Fund Financing Tie-Ups After Investec Deal

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(Bloomberg) -- Ares Management Corp. is exploring partnerships with other financial institutions, following its recent tie-up with Investec Bank Plc, to expand its offering in the fund finance market, according to Richard Sehayek, managing director of Ares Alternative Credit.

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Last month, the private credit firm announced a funding agreement with Investec to set up a vehicle that will take on so-called subscription lines, a type of low-risk, temporary financing deployed while waiting for investors to provide committed money. Deals will be originated by Investec, which will hold a portion of the subscription lines, while the remainder of the instruments will go into a special purpose vehicle funded by Ares, alongside other investors.

“Capital charges are getting more punitive,” Sehayek said in an interview, speaking about the Investec partnership. “Holding this debt on your balance sheet isn’t getting any easier and those balance sheets aren’t infinite. This type of transaction allows for firms to lead more deals and do bigger deals.”

In October, Goldman Sachs Group Inc. teamed up with Blackstone Inc. to package capital call lines, a similar type of financing to subscription lines, into bonds, the first time such debt has been sliced up into broadly sold asset-backed securities. Sehayek declined to comment on the transaction.

Ares’ deal with Investec similarly slices up the risk involved in this type of debt. Investors were able to buy senior, mezzanine or junior instruments, depending on their risk appetite. “We’ve effectively paired up the right capital with the right counterparty in this deal,” he said.

Transactions involving fund financing instruments are likely to be the start of a trend that’s strengthening as financial institutions become more accustomed to this type of financial engineering, Sehayek said. “I believe it’s where fund finance is going,” he added.

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