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Private capital group Ares Management has held talks to acquire Leonard Green & Partners, one of the oldest and most profitable private equity firms, in a deal that would more than quadruple the size of its PE business.
The two held discussions about a potential tie-up recently, according to people familiar with the matter, who cautioned that the groups could ultimately decide to walk away from the deal.
An acquisition of Leonard Green would dramatically expand Ares’ presence in corporate private equity, where it lags behind rivals such as Blackstone, Apollo and KKR, and would transform the Los Angeles-headquartered investment group into a diversified alternatives giant from a specialist best known for its private credit investments.
Ares manages $644bn in overall assets, but just $25bn is in private equity fund strategies. Leonard Green, which is also based in Los Angeles and manages roughly $85bn in assets, is considered one of the premier private equity groups, having earned large windfalls including its recent $18bn sale of a building-products distribution company to Home Depot.
A deal would hasten a wave of consolidation in private markets as large listed players such as BlackRock, Brookfield, TPG, CVC and EQT use their financial resources to broaden their investment operations.
It would also give Ares a significant foothold in traditional PE at a time of trouble for the industry, which has seen fundraising slow as a $4tn logjam of ageing, unsold deals grows.
Nonetheless, many established firms continue to attract new money and have grown enthusiastic about the opportunity to offer PE to individual investors such as wealthy savers and retirees, expanding their backers beyond traditional institutions such as pensions.
Ares and Leonard Green declined to comment.
Leonard Green’s approach of buying companies with predictable earnings such as goods distributors, restaurant and fitness franchisees, car washes and healthcare service companies is considered a strong fit for such retail-oriented strategies, a marketplace dominated by Blackstone.
The firm is also considered by PE executives to be one of the leanest and most profitable buyout groups in the world, with a small staff of dealmakers who carve up the spoils of large windfalls.
Merger activity has been high across the industry as groups look to diversify their businesses and drive the growth of lucrative management fees that are prized by investors in publicly listed asset managers.
Many firms, including Ares, are also coalescing around the view that pension plans and sovereign wealth funds are keen to conduct more of their business with fewer managers.
The acquisition spree has seen leading independent firms such as infrastructure specialist Global Infrastructure Partners, private credit manager HPS, specialist debt firms Castlelake and Angelo Gordon and secondaries managers Lexington Partners and Coller Capital to sell to larger rivals. Many of the pioneers in private markets that helped shape the buyout business, including KKR and Apollo, have also used acquisitions to expand in new areas of private markets such as insurance-based investments.
Ares chief executive Michael Arougheti told the FT last year that the firm was open to an acquisition that would bolster its legacy private-equity franchise.
“We have a lot of financial capacity to buy and we have a lot of financial capacity to build,” he said in December. “Even the largest global private equity managers would not be significant from a market cap standpoint relative to where we are.”
Both Leonard Green and Ares trace their roots to the 1980s boom in leveraged finance ushered in by Michael Milken’s Drexel Burnham Lambert.
Ares was co-founded by Antony Ressler, a Drexel banker who would help co-found Apollo Global in the early 1990s after the collapse of the junk bond pioneer. But Ressler eventually left Apollo to found Ares in 1997 alongside a group of partners.
Arougheti has helped to grow the once-niche firm into a huge player, turning to a number of acquisitions to push Ares beyond its core credit franchise and into markets such as real estate deals and managing second-hand private equity fund stakes.
Leonard Green, meanwhile, is an offshoot of private markets pioneer Gibbons Green, which has been built up over the past three decades by managing partners Jonathan Sokoloff and John Danhakl, two Drexel alumni who remain close to Milken.
With additional reporting from Sujeet Indap in New York
