The burgeoning multi-trillion-dollar private credit market continues to make headlines, partly driven by investor fears over opacity, overcrowding, and undisclosed risk. The asset class’s growth into a dominant force in private capital is attracting intense scrutiny.

“We get calls all the time about our views on the headlines or literally the day before,” said Henry Lee, partner and head of wealth management solutions for Asia at Ares Management.

But the reality on the ground suggests a more resilient asset class than the critics claim — Lee addressed some of the misconceptions surrounding the industry to Asian Private Banker, from the size of borrowers to the frequency of markdowns.

“We’re front-footed in communicating with advisors, bankers and their clients, because we know there’s so much misinformation out there about private credit that we want to set the record straight,” he added.

The first myth that Lee sets out to dispel is the “small and risky” label often applied to middle-market companies. He countered that idea, arguing that the breadth of Ares’ activity includes companies ranging from US$10 million in EBITDA up to the largest size of over US$1 billion in EBITDA. They are not small, and the perception that they are inherently risky is flawed.

Lee identified a second common myth: that “private markets not being marked-to-market means there’s no transparency and true value.” He addressed the comparison between daily mark-to-market valuations in public markets and the valuation process in private markets, saying it is like “comparing apples with oranges.”

“I would argue that daily mark-to-market serves a purpose in public markets, because people want to trade. But for private wealth investors, the real value that they care about is the price at which you enter the investment and the price at which you exit, instead of what someone else’s view is in between,” he explained.

Lee emphasised that Ares’ valuation process involves independent valuation companies that regularly review and mark portfolio companies. He sees this valuation process as far more realistic and accretive to a long-term investor’s goals.

A crowded trade?

The notion that private credit is overcrowded is yet another misconception. Lee acknowledged that the entry of new firms without track records or established teams is a valid concern, which emphasises the importance of manager selection.

However, he stressed that the supply of credit has been impacted by a regulatory and structural shift that continues to grow.

As an example, post-GFC regulations reduced bank lending. At the same time, private equity dry powder for North America is about four times that of private credit dry powder (as per Ares’ observations based on Preqin data), fuelling a massive US private middle market, but creating a persistent supply-demand mismatch for credit and a sustained need for private credit.

Lee cited Ares’ portfolio data from its recent public earnings call showing year-over-year double-digit EBITDA growth across its US direct lending strategies, despite higher interest rates and supply chain disruptions over the past few years.

Hiring incrementally

The rise of private credit converges with the growing appetite of institutional funds and the rapidly expanding private wealth channel, which accesses the strategy mostly via evergreen structures to capture income-focused returns, leveraging the illiquidity premium and the inherent rising-rate protection of its floating-rate instruments.

Ares’ wealth management solutions platform, which oversees private investment offerings for the global wealth management channel, started building its Asia team in 2022, with Lee joining as a partner in Hong Kong. The team covers major markets in the region, including Hong Kong, Singapore, Australia, and Japan.

Most recently, the Asia team saw the departure of Bosco Lee, who previously served as the managing director and head of product management for Asia, in October. Bosco Lee subsequently joined Goldman Sachs Asset Management as the head of alternatives for third-party wealth for Asia Pacific ex-Japan.

“We’ve been hiring incrementally every year,” said Lee. While the firm does not disclose staff numbers for the unit for Asia, Ares’ Wealth Management Solutions team has over 165 dedicated professionals globally.

With US$596 billion of assets under management, US private equity giant Ares Management Corporation (Ares)’s edge comes from its over 20 years of scaled private credit experience, compared with peers that have pivoted more recently to the asset class, according to Lee. Ares’ client base is predominantly institutional through closed-end funds.

In-demand alternative strategies

When asked about the strategies in demand in the region, Lee believes that private credit is still the most attractive strategy among wealth channel clients, as they are looking for tax-advantaged, durable income.

He added that real assets, especially infrastructure, also fall into the above category and represent a key strategy in demand by individual investors in Asia.

However, he noted that many infrastructure strategies in the market often invest in developing infrastructure assets that generate lower overall portfolio yields, as opposed to strategies that focus on fully developed, cash-flow-generating infrastructure assets.