At a recent analyst day, Ares Management made a noteworthy announcement that could reshape the landscape of alternative investments. The firm, a prominent player in the alternative asset management space, raised its three-year fundraising targets by an impressive 25%. This adjustment, as CEO Michael Arougheti explained, stems from an unexpected surge in interest from affluent individual investors.
Recent data from a State Street survey underscores this emerging trend, projecting that the so-called “retail revolution” will account for over half of the private market flows in the coming years. This marks a significant departure from the traditional reliance on institutional investors for fundraising. Ares has strategically positioned itself to capitalize on this shift, having provided various investment vehicles for retail investors for more than two decades. According to Arougheti, the enhancements in product quality and scale, along with substantial investments in client service, have been pivotal to Ares’s success in this arena.
Currently, Ares boasts more than $50 billion in assets under management from semi-liquid vehicles designed for retail investors, capturing approximately 10% of the burgeoning retail segment. Arougheti emphasized that the firm’s dedicated team of 185 professionals across ten global offices is focused on product development and client education, a clear indication of Ares’s commitment to this market.
However, as the momentum for retail allocations in alternative investments accelerates, some industry observers have raised concerns about the potential for fund managers to reserve higher-quality deals for institutional investors, while directing less favorable options towards retail clients. A recent paper from Harvard University highlighted a performance disparity among funds marketed broadly, suggesting that less wealthy and financially sophisticated investors may be receiving inferior offerings. Addressing these concerns, Arougheti firmly rejected the notion that weaker products are being funneled to retail investors. He argued that only managers with substantial scale can access high-quality deals, and Ares’s investment strategy reflects a commitment to equitable allocation across both institutional and retail portfolios.
As of June, Ares managed approximately $572 billion in assets, with a significant two-thirds allocated to credit and investments in over 3,000 middle-market companies. This impressive scale underscores Ares’s robust infrastructure and its capacity to navigate diverse investment landscapes.
So, what drives individual investors to explore alternatives at this juncture, especially in light of the strong performance of public equities in recent years? Arougheti suggests that the growing concentration in liquid securities has made it increasingly challenging to maintain a well-diversified portfolio in public markets. Investors are seeking non-correlated equity exposure, which private equity, real estate, and other alternative investments can provide.
Looking ahead, the potential for greater allocations of alternatives within 401(k) retirement plans could further boost Ares’s assets under management. However, Arougheti expressed skepticism regarding the pace of such regulatory changes, highlighting the fee sensitivity of the retirement sector. Until plan sponsors feel secure about their fiduciary duties and the potential for litigation, substantial shifts in investment behavior may remain slow.
In a broader context, Arougheti urged a reevaluation of the term “alternative.” He contends that what Ares offers has evolved beyond being merely alternative; it is now part of the mainstream investment landscape. The misconception that private markets provide unique investment opportunities that would not otherwise exist overlooks the fact that this shift represents a natural progression in capital market innovation.
In conclusion, as Ares Management navigates this transformative period, it illustrates the growing influence of retail investors in the realm of alternative investments. With a focus on quality, education, and equitable access, Ares is well-positioned to lead the charge as the investment landscape continues to evolve.
