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Only two miles separate the Los Angeles headquarters of Ares Management and Leonard Green Partners. But a potential marriage between these two asset management titans will test how far apart they are in culture.
The FT reported this week that Ares, which manages more than $600bn of client money, is discussing a takeover of Leonard Green, with $85bn of assets under management. Ares is focused on private credit, and Leonard Green on private equity. Both firms, as it happens, were founded by alumni of Michael Milken’s junk-bond shop Drexel Burnham Lambert.
Elsewhere, it’s already common to find private equity and credit under the same roof. When Blackstone, KKR and Apollo first went public well over a decade ago, institutional investors were lukewarm about their private equity-driven business models. Profit from corporate buyouts was erratic, if large, and thus hard to predict. Their response has been to build huge credit and insurance businesses, easier for mutual funds to model.
Ares, while smaller than those private capital colossi, has typically traded at the higher end of the valuation spectrum. Its shares are currently valued at 29 times its trailing “fee-related earnings”. That has made it an active acquirer, filling in niches like real estate and “secondaries”, the business of buying slices of already existing funds, or the assets within them.
Buying a full-fledged buyout firm, probably in the billions of dollars, is a bigger challenge. Leonard Green made its name investing in companies including retailer J. Crew and fast-food purveyor Shake Shack, as well as — less happily — failed hospital chain Prospect Medical. Data from Californian public pension giant Calpers shows recent funds have returned between 11 per cent and 18 per cent, annualised. That’s higher than private credit typically achieves, but less than stellar for private equity.
Financial deals always involve tricky negotiations over human capital too. Executives at buyout firms and more “opportunistic” funds, given their high targeted returns and occasional windfalls, can bring elevated expectations of compensation and perks. Employees may resent the idea that their activities are subsidising those in other businesses. Wall Street giants such as Goldman Sachs and Citigroup tout their collegial approach, but blending strategies and personalities is always a work in progress.
Firms such as Leonard Green, with founders who have created immense value over several decades, can nonetheless find M&A an elegant way to tackle succession issues or, in some cases, softening returns. Selling to a diversified player should also be less fraught than a public listing. Even so, the road to a harmonious union is longer than Google Maps might suggest.
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