Ares Management Leads in Valuation as Private Equity Evolves

The landscape of private equity has undergone a significant transformation in recent years, with firms evolving into alternative asset managers and prioritizing fee-based income. This shift has led to a reshuffling of valuations, with Ares Management currently leading the pack.

The journey began in 2007 when Fortress Investment Group spearheaded a wave of private equity firms going public. Initially, these firms struggled to impress investors due to their lumpy earnings and partnership structures. However, a strategic pivot has since occurred, focusing on generating steady fee income rather than relying on carried interest from investments.

This transformation is evident in the numbers. In 2016, management and advisory fees accounted for less than half of Blackstone's revenue. By 2023, this proportion had surged to over 80%. The industry's shift towards corporation status, initiated by KKR in 2018, has also opened doors to a broader investor base.

The rise of private credit has played a crucial role in this evolution. Assets in direct lending grew to approximately $830 billion in 2023, a twentyfold increase from 2010. This growth has particularly benefited Ares Management, which was founded in 1997 with a focus on lending. In 2023, direct lenders financed three-fifths of buyouts, a record high.

"We expect defaults to rise."

The current market environment presents both opportunities and challenges. While higher interest rates have boosted returns for private debt, they also increase the risk of defaults. Business Development Companies (BDCs) have seen a rise in in-kind payments, from less than 4% of total interest and dividend income in 2019 to 9% in the first quarter of 2024.

Looking ahead, the industry faces potential shifts. The U.S. Federal Reserve is expected to lower interest rates in September 2024, which could ease borrowing burdens but also intensify competition. Traditional private equity firms are poised for a revival, with record-size war chests ready for deployment.

The race for market share continues, with firms targeting individual investors and expanding into new areas. Blackstone has introduced products like BREIT and BCRED, while Apollo Global Management's merger with insurer Athene presents a different strategic approach. KKR sees an $11 trillion opportunity in tapping individual investors, while Blackstone estimates a market eight times larger.

As the industry evolves, the battle for the top valuation spot remains fierce. With Ares Management, Blackstone, Apollo, and KKR all vying for dominance in a rapidly changing landscape, the future of alternative asset management promises to be both competitive and transformative.