Ares No Longer Needs Direct Lending to Carry Its Growth

What's New

Ares Management, the $691 billion alternatives manager, shows in its latest quarterly earnings presentation that its growth no longer depends on its biggest business. U.S. direct lending had a slow quarter, and credit deployment fell 33%. The firm still raised $31.0 billion, with more than half coming from outside its Credit Group. Real Assets fee-related earnings rose 32%. Firmwide FRE grew 11% to $524 million. CEO Michael Arougheti said the growth story now rests on several scaled businesses rather than any single strategy. Ares is testing that claim in a quarter when its core engine paused.

Why It Matters

Ares built its name on U.S. direct lending, and investors still read the stock through that lens. This quarter shows a different shape. Credit raised nearly $15 billion without a single flagship commingled fund closing. Real Assets deployment rose 80% while credit deployment fell. Wealth AUM grew 41% to $82 billion despite the noise around non-traded BDCs. For allocators, the firm that once meant one strategy now offers scale across infrastructure, real estate and secondaries. For shareholders, it means a slow quarter in direct lending no longer sets the pace for the whole firm.

Big Picture Drivers

• Long-duration capital: Perpetual capital rose 23% to $233.9 billion, and 93% of management fees come from perpetual or long-dated funds.

• Infrastructure scale: Total infrastructure AUM grew more than 50% over the year. The open-ended core infrastructure fund raised $2.7 billion in the quarter, the largest wealth raise for any Ares fund.

• Secondaries growth: Secondaries AUM has grown about 70% over two years. The Global Structured Solutions fund closed at $4.2 billion against a $1 billion target.

• Floating-rate credit: 83% of credit debt assets are floating rate, so higher base rates lift returns for credit investors and fees for Ares.

• Credit quality: U.S. and European direct lending interest coverage sits at 2.1x and 2.3x. U.S. non-accruals improved to 1.8% from 1.9%.

By The Numbers

• $31.0 billion: Gross capital raised in the quarter, more than half outside the Credit Group.

• $826.9 million: Potential incremental annual management fees from $93.8 billion of AUM available for deployment and development assets not yet stabilized.

• $8 billion+: First close for the new U.S. senior direct lending funds, 60% larger than the prior vintage's first close.

• 42.5%: FRE margin, up from 41.4% a year earlier.

• $185 billion+: European-style incentive-eligible AUM, 75% of it in private credit funds compounding above their hurdles.

Key Trends to Watch

• Fourth-quarter deployment: U.S. direct lending pipelines sit at record levels, and some deals closed early in the quarter. Management expects a more balanced deployment mix as the seasonally strongest quarter arrives.

• Delayed carry: Slower exits pushed back European-style waterfall payments, in some cases by a year or more. Ares now expects $300 million to $325 million of net realized performance income for the year, with $160 million to $185 million in the fourth quarter.

• Digital infrastructure fund: A meaningful first close is expected in the fourth quarter. Catch-up fees from the fund would support 2027 margins.

• Portfolio acquisitions: The $1.1 billion direct lending portfolio purchase and ARCC's planned acquisition of MFIC point to more performing loan books changing hands as owners reposition.

Analyst Sentiment

• Positive: The size and speed of the U.S. senior direct lending first close, and a 20% dividend increase.

• Optimistic: The core infrastructure fund's momentum in the wealth channel and the coming digital infrastructure first close.

• Supportive: Ares's selective approach to AI infrastructure, which favors pre-leased data centers over GPU financing.

• Constructive: Performing portfolio acquisitions as a new deployment channel, and an improving trend in non-traded BDC redemption requests.

• Watching: Whether higher rates slow U.S. direct lending deployment, and whether fourth-quarter activity carries into the first half of 2027.

• Cautious: Spread volatility in data center financing and the sensitivity of AI capital spending to higher financing costs.

• Mixed: Slower growth in AUM, FRE and management fees this quarter against management's view that 2027 has meaningful upside.

• Neutral: M&A, where Ares says its bar is higher than ever, and the timing of 2027 performance income.

Key Questions

• Direct Lending Conversion: Does the record U.S. direct lending pipeline turn into fee-paying AUM in the fourth quarter, or slip into 2027?

• Carry Timing: How much further can delayed exits push European-style waterfall payments before they weigh on realized income growth?

• AI Discipline: Can Ares stay out of GPU financing while competitors build share in the larger half of the AI capital spending market?

• Wealth Durability: Will ASIF flows rebound as management expects, or will wealth growth stay concentrated in infrastructure and real estate?

• Inorganic Growth: Where would Ares deploy capital for acquisitions in infrastructure, private equity or insurance, given how high it has set the bar?

Key Quotes

• Michael Arougheti (CEO) on the Growth Story: "As we step back from the quarter, the most important takeaway is that the Ares growth story is increasingly supported by multiple scale businesses rather than any single strategy or market."

• Jarrod Phillips (CFO) on Embedded Fees: "This embedded fee potential is important because it gives us visibility into future management fee growth without requiring a particular level of fundraising in any single quarter."

• Michael Arougheti on GPU Financing: "They tend to be a little bit more complex. They tend to be a little bit more concentrated and, at least I, for one personally, do not know how to underwrite the decline in depreciation curves on that type of technology."

• Jarrod Phillips on Performance Income: "Importantly, 75% of this incentive-eligible AUM is in our private credit funds that are compounding performance income above their hurdles, and therefore, the slower repayment environment could theoretically increase the amount of performance income, all else equal."

The Wrap

Ares spent a quarter with its largest business in a lull and still grew fees, margins and its dividend. Infrastructure, real estate, secondaries and wealth did more of the work. Credit raised capital through channels that no longer depend on flagship closings. None of this means direct lending is fading, and management expects it to rebound with a record pipeline and a large new fund family. The thesis rests on the other businesses keeping pace once lending recovers, and on delayed carry arriving as the older credit vintages mature. If both hold, a soft quarter in one strategy becomes routine rather than a warning sign. The fourth quarter, Ares's strongest season for deployment, will be the first test.