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Stock Strategist

Ares' Focus on Credit Should Pay Off

We think that as alternative asset flows consolidate around a few select global managers, Ares will benefit.

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 Ares Management (ARES) specializes in credit, and its exposure to that market is one of the largest in the industry at 80% of its assets under management. We consider credit AUM and Ares' model to be less volatile than private equity; performance fees tend to be more stable, as they are tied to interest and dividend payments rather than private equity exits.

We'd define the credit opportunity for Ares in two ways. First, banks are divesting themselves of risky and complex credit instruments to buyers like Ares because of tougher regulatory rules. Ares, as a result of its deep expertise and extensive relationships, is better positioned than most investors to acquire these difficult-to-value instruments at a reasonable price from forced sellers, generating excess returns for its investors. We see the total opportunity here as sizable; potentially more than a trillion dollars' worth of assets could be divested over the next decade.

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.